Securing an Auto Dealer Bond Despite Bad Credit

Each state has its own rules and regulations for businesses that want to operate as licensed auto dealers, but one thing remains constant. An auto dealer bond is part of the process of legally operating a dealership regardless of the size of the dealership, its niche market, or its location. Auto dealer bonds protect consumers from fraudulent activities or misrepresentation, and for this reason, are tied to certain attributes of the dealer like personal credit history. If you have less than perfect credit but need an auto dealer bond to operate, there are strategies to get through the process despite your financial track record.

Understand Bond Basics

For any auto dealer in the process of getting licensed in a particular state, they have likely heard of an auto dealer bond. However, that does not mean the details surrounding how bonds work, who they benefit, and what they cost are clear. First, bonds are not to be mistaken with insurance for the dealership or the business owner. Instead, they are an agreement between the auto dealer, the surety company, and the prospective customer that dealings with the dealership will be in line with the state’s regulations. In the event fraud or a misrepresentation takes place, the bond company agrees to pay claims on behalf of the auto dealer to the customer. Ultimately, the dealer is responsible for repayment of claims.

Because of this unique relationship between the surety company, the auto dealer, and the customer, auto dealer bonds are based heavily on the dealer’s ability to repay a claim should one arise. This means personal credit history and score come into play in a significant way. When your credit is lackluster, a surety company sees you as a greater risk than someone who has a strong financial history. Poor personal credit may involve missing payments for credit cards or loans, filing bankruptcy in the last few years, experiencing a foreclosure, or having a tax lien placed on your credit file. Any of these cases create doubt in the surety company’s mind that you have the ability to repay a claim against your auto dealer bond.

However, having bad credit does not mean you are completely out of luck when it comes to securing a bond. Instead, a surety company may increase the price of your auto dealer bond until credit is back to a comfortable position. Bonds are priced as a percentage of the total bond amount needed, and so the initial cost of your bond will be a higher percentage when credit is lacking. As your work to improve your personal credit, through on-time payments, clearing of collection accounts or other negatives, and showing responsible use of current credit, the percentage you pay for your auto dealer bond will be reduced.

Demonstrate Industry Experience

While credit history is a significant factor in securing an affordable auto dealer bond, surety agencies also look to other aspects of your business. This often includes the track record you have owning and operating a dealership. If you have been in business for several years, with no claims against dealer bonds in the past, a bonding agency may take this into consideration when evaluating your bond application. Have records of your success in the industry to show along with credit history and business financials.

Spruce up Business Financials

Speaking of business financials, bond companies also take into account what’s happening from a financial perspective with the dealership. If your credit is an issue, take time to gather and organize records pertaining to the state of your dealership, including an up-to-date balance sheet that offers accurate information about the business’ assets, liabilities, and owner’s equity. In addition to the balance sheet, having a cash flow statement that shows positive revenue and profit over time is beneficial to your bond application.

In addition to these common business financial records, surety agencies will consider your accounts receivable records as part of your bond application package. Accounts receivable highlight who owes you and in what amount, even if that revenue has yet to be collected. Keeping track of this information is a crucial aspect of your balance sheet, and it should be updated prior to submitting an application for a new auto dealer bond.

Having bad credit is not the end of the world for auto dealers, large or small, but it does mean additional work is necessary to ensure a new auto dealer bond is both available and affordable. Start with an evaluation of your personal credit and put in the time and effort to correct any glaring issues before applying for a bond. If that isn’t feasible, highlight your success in the auto dealer industry if you’ve been in operation for several years. Finally, prepare and update business financial documents including the balance sheet and cash flow statements to show your dealership in the best possible light. Surety agencies reviewing your auto dealer bond application will take each of these components into consideration, and hopefully, to your benefit.


Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

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