Are you considering starting a car dealership in Texas? With the upward trend in the US economy, and the steady demand for motor vehicles in the state, the time is right for launching a new Texas auto business.
Before you set off on your entrepreneurial journey, you’ll want to be prepared, by learning the nitty-gritty details about how to get a dealers license in Texas. Like in most states, you’ll need to comply with the state regulations that govern the business, by getting a Texas auto dealer license and a surety bond.
While the process can be complicated, you can make it easier by getting all the information and knowing the best tips for a smooth start.
Here are five easy tips, to give you a jump-start in the very beginning of your dealership career.
1. Identify the type of license you need
How can you become a car dealer in Texas? If you’d like to buy, sell or exchange used motor vehicles in the state, you must obtain a general distinguishing number (GDN) from the Motor Vehicle Division of the Texas Department of Motor Vehicles (TxDMV). This is, in essence, your Texas used car dealer license.
If you also want to sell new cars, you have to get a franchised dealer license along with the GDN. In both cases, you should start by obtaining all the necessary documents needed for the license application.
Your first step is to identify the type(s) of license you need, by consulting the TxDMV list of licenses. If you want to sell motorcycles, trailers or other kinds of motor vehicles, you need to obtain a license for each type separately.
You can find full information on all types of licenses in the Licensing section of the TxDMV Dealer Manual.
2. Carefully prepare all documents you need for your license application
To make sure that your application will be accepted the first time you submit it, be extra careful when filling in the form itself, and when preparing the documents that accompany it. Verify that you are giving your correct phone number and address, so that TxDMV can contact you successfully if needed.
The usual documents that are required along with your application are:
- Proof of an established and permanent business location (proof of lease or ownership), that is compliant with local zoning and equipped with a permanent business sign. It should have space for at least five vehicles of the type that you want to deal with.
- Certificate of Incorporation, Organization or Partnerships to prove the legality of the entity applying for a license.
- If your company is a partnership, corporation, limited liability company or limited partnership, you have to provide your Employer Identification Number (EIN), obtained from the Internal Revenue Service, on your application form.
- For most types of licenses, you need to submit a surety bond in the amount of $25,000. The bond should cover a period of two years that matches the dates of the license duration.
3. Research your bonding options
An indispensable requirement for obtaining most types of Texas dealer licenses is to get a $25,000 Texas auto dealer bond. Only franchised dealers, travel trailer dealers and trailer/semitrailer dealers are exempted from this requirement.
The auto dealer bond is a three-party contract between your business as the principal, the state of Texas as the obligee, and the surety that provides the bond.
The goal of the Texas dealer bond is to guarantee that your dealership will follow all its contractual obligations. Thus, it is a safety net for the general public, guaranteeing that your business will act in accordance with the law.
In this sense, it’s very important to choose your surety bond agency carefully. Look for a trustworthy agency with a solid reputation, so you know that your dealership will get the backing you need.
The best approach is to use the services of agencies that work only with A-rated, T-listed surety companies. This gives you the security that your bond is fully guaranteed, and your customers are completely protected.
3. Pay less for your Texas motor vehicle dealer bond
Besides wondering how to get a surety bond in Texas, the second concern of dealers is how to reduce their surety bond cost.
When you get bonded, you need to pay only a percentage of the bond amount, which in this case is usually $25,000. This percentage is called the bond premium. To determine this premium, the surety will take a good look at your personal and business financials and credit score, as well as the management and overall prospects of your business.
The better these stats are, the better the chances that your dealership will be seen as a low-risk applicant. If you qualify for the standard bonding market, you’re likely to pay between 1%-3% of the bonding amount, or between $250 and $750 for a Texas dealer bond.
To reduce your bond costs, make sure to take care of any old liens or judgments and take steps to improve your credit score before applying. It’s also important to properly illustrate the strength of your business, by showcasing your overall finances and good business practices.
5. Obtain your dealer license
Once you’ve prepared all required documents, researched and chosen a solid surety agency, and obtained your bond, it’s time to submit your completed application. Make sure you keep copies of your documents for future reference.
The licenses are issued for two years, and you need to pay the relevant application fees along with your application. The payment gets processed first. Then your application will be scanned and given a Work Item Number in order to get reviewed, and you’ll get an email notification at this stage.
If the TxDMV needs more documents to assess your application, you’ll be contacted in due time. When you get approval, you will get a printed version of your license by mail, so make sure you’ve provided a correct mailing address.
With your dealer license issued, you’re ready to start your auto dealer business.
While getting your Texas auto dealer license is rarely easy, following these five tips is bound to make your licensing process smoother.
If you have any questions about the bonding process, give us a call at 866.450.3412 or contact us online. Our auto dealer bond experts are here to help.