Selling cars can be a very lucrative way to earn an income. As with any entrepreneurial endeavor, there are various things that you'll need to learn to establish your own used car dealership in your state. Much of this has to do with licensing requirements and setting up insurance and bonds.
What Are the Legal Requirements for a Car Dealership?
To start a used car dealership, it's vital that you obtain an operating license and a dealer license. To satisfy these licensing requirements, you'll need to obtain an auto dealer bond.
If you're wondering what a surety bond is, let us explain. This bond should be thought of as a guarantee that you'll be conducting your business according to federal, state, or local laws. If you commit fraud or violate these laws in any way, those harmed by your actions will be reimbursed with your bond money.
Many entrepreneurs looking to start their own used car dealerships will invest in dealer education courses. These explain the laws regarding automotive dealerships in your state. This will give you insight into the key laws that you'll need to follow at your new place of business.
How Do Used Car Dealerships Make Money?
As a used car dealer, there are various ways you can make money. You can obtain vehicles from wholesale-only dealers and resell them for a profit. When you first start out, this may be your main source of income.
Over time, you may endeavor to purchase broken vehicles. Once fixed, you can sell cars for a bigger profit. Additionally, expanding to offer auto repairs, maintenance, notary services, and parts can be a great way to supplement your income for your used car dealership.
What is the Difference Between New Car Dealers and Used Car Dealers?
The biggest difference between a new dealer and a used car dealership is that the latter only offers used vehicles. They do not sell any new motor vehicles or loan inventory from manufacturers.
What Are the Benefits of Becoming a Used Car Dealer?
Used car dealerships can be a great way to help create your own business that is flexible. One of the main advantages of opening a used car dealership as opposed to a new car dealership is that you can actually sell all different makes and models of vehicles. Most new car dealerships are restricted in the make of vehicles that they can sell.
As a used car dealer, you have the freedom to obtain vehicles from all different sources. You're not confined to only leasing vehicles directly from the manufacturer. This means that you can decide to buy used vehicles from a dealership one day and then get cars that need to be repaired at auction the next. This creates a larger pool of vehicles that you can choose from to supply your inventory throughout the year.
Steps to Become a Used Car Dealer
Becoming a used car dealer isn't as easy as just finding inventory. Rather, you need to obtain an operating license, dealer license, surety bond, and insurance to operate legally in your state. We've created an easy step-by-step guide below to help you on your new journey of opening a used car dealership.
Step 1: Create a Business Plan
Before you start undergoing any of the legal requirements or setup for your business, you first want to sit down and construct a business plan. This outlines what your intent is, how you plan on managing your business, your operation scheme, and how you plan on financing it. By taking the time to do this now, you'll have it ready when you apply for financing, and it will keep you on track as you work towards becoming a wholesale or retail dealer.
Step 2: Obtain a Business License
Next, it's time to obtain an official Business License to operate your car dealership. You can obtain a license by visiting the website of your business licensing authority or Secretary of State. You'll need to submit some basic information about you and your business to the California DMV.
You'll also need to obtain an EIN from the IRS website if you plan on having employees at your business. This EIN will need to be supplied alongside your dealer license application form to be successfully considered for the application process.
Step 3: Apply for a Car Dealer License
Another must-have before your business starts operating is a car dealer license. This vehicle dealer license can be obtained through your state's Department of Motor Vehicles (DMV) website. The specific requirements to obtain this dealership license and business zoning are going to vary from state to state.
However, there are some key dealer license application requirements that many states similarly require. These include a secure location, an office on-site with a working landline, a display area, and a permanent sign. Some states go even further and require owners to undergo a dealer education course and exam. You'll need to obtain a certification of completion and pass a criminal background check.
When submitting your application to sell cars that are used, you'll need to pay a small application fee. This license fee varies from state to state. You'll need to renew your auto dealer license typically every two years. Your state government will send you licensing requirements for your renewal.
After you obtain occupational licensing and submit your dealer license type, you'll want to apply to get license plates and a sales tax number. To be a licensed dealer, you need to have dealer plates to put on your inventory.
These must be on the vehicles in your display area so that customers can test drive them. The number of plates you can obtain for your motor vehicle dealer is going to depend on the state that you live in. Many will allow a retail resale dealer to obtain up to 25 plates.
Step 4: Get an Auto Dealer Bond
You can expect that most states will require that you obtain insurance coverage and a surety bond. This is a dealer bond that helps to provide coverage in the event that you don't follow the laws declared in your state. This auto dealer bond can typically be obtained for just a small percentage of the total coverage amount.
Your credit score and some other factors will play a large role in determining your bond amount. It's highly advisable to get bond quotes from different sources before determining which one to buy.
Step 5: Get Cars to Fill Your Lot
Once you obtain your business license, vehicle dealer surety bond, and used car dealer license, it's time to start getting cars to fill up your business location. Many new car dealers get their inventory directly from the car manufacturer. However, used car dealerships obtain their inventory from a variety of sources, which include:
- Private Individuals
- Wholesale Dealers
- Trade-Ins at New Car Dealers and Trailer Dealers
Having a wide variety of vehicles, ranging from sedans to pickup trucks, is a great way to attract a large number of clients.