Why Most Car Dealerships Think Surety Bonds are the Best Option

In order to receive a dealership’s certificate of registration from Vermont’s Commissioner of Motor Vehicles, dealerships must show the state they have funds available to settle any successful claims of fraud filed against them. Even though there are several ways to prove that funds are available, many car dealerships in the state use surety bonds. Here’s why dealers usually use bonds, instead of the other options.Surety Bonds Vermont

Even Though Car Dealerships in Vermont Don’t Technically Need Surety Bonds, Most Find They’re Preferable to the Alternatives

Surety Bonds Protect the State of Vermont and Customers

Surety bonds are an insurance product, but they’re an unusual kind of product. While car dealerships purchase the bonds, the bonds aren’t designed to protect dealers from potential perils. Instead, their purpose is to protect both the State of Vermont and customers who do business at a dealership from issues of fraud.

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Should either the state or a customer file a successful fraud claim against a car dealership, the dealership’s surety bond (or other source of funds) is designed to provide compensation for monetary loss suffered by the state or customer. For example, the state might find that a dealership inaccurately reported or failed to pay all of its sales tax. Alternatively, a customer might claim that a dealership didn’t do all they were legally obligated to. If claims like these are found to be accurate, a surety bond may provide the claimant with financial compensation.

Bonds Are One Option for Car Dealerships in VT

For most car dealerships in VT, these bonds are one of three ways of proving that funds are available to pay successful fraud claims. A dealership may use:

  • A surety bond

  • A line of credit

  • A certificate of deposit

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(If a certificate of deposit is used, it likely must be issued in the dealership’s name but assigned to the Commissioner, or someone they designate.)

Whatever method is chosen, a dealership likely must prove that it has between $20,000 and $35,000 in available funds. The exact amount depends on how many vehicles a dealership has sold in the past two years.

Many Car Dealerships in VT Use Bonds

Of these three options, bonds are the best choice for most car dealerships in the state.

Some dealers with poor or little credit history can’t qualify for a line of credit, and even those that are able to often don’t want to use a line of credit because doing so might impact the dealership’s borrowing potential. Credit that’s used for state-required purposes is borrowing capital that can’t be put towards acquiring more inventory or growing a dealership. In contrast, bonds are available to most dealers, as long as they pay the required premiums.

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Certificates of deposit are usually only an option for successful, established dealerships, as less-successful and newer ones usually don’t have tens of thousands of dollars to stow in a CD. As is the case with lines of credit, even those that have capital available often get bonds instead so they can use their capital for other purposes.

Learn More About Bonds for Car Dealerships in VT

To learn more about the licensure requirements for car dealerships in Vermont, including the role that surety bonds play, contact an insurance professional who is familiar with these products. They’ll be able to help you determine the exact costs of a bond for your dealership, so that you can decide whether it’s the best of the three options for your company.

Topics: Surety Bonds

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