Two Different Kinds of Auto Dealers
What is a Retail Auto Dealer License?
What is a Wholesale Auto Dealer License?
If you’re a car enthusiast looking to get into the lucrative and exciting auto dealer industry, it’s important to understand the distinction between the different kinds of auto dealers licenses to choose which kind of auto dealer you want to be. While there are many different kinds of auto dealer licenses—in Arizona, for example, there are 8—auto dealers are most often torn between two types: wholesale vs. retail dealer license. This is an important career choice for an auto dealer, as the type of licensing (wholesale vs. retail) dictates whom the auto dealer can sell cars to. . Knowing the difference between the two and making choice that best helps your business is an important first step to starting a car dealership or purchasing vehicles for resale. In this article, we break down retail vs. wholesale auto dealer licenses and discuss the types of business each license is best suited for.
Auto dealers are businesses focused on the buying and selling of cars. Dealers source their inventory from a variety of places, including trade-ins, auctions, and directly purchasing new vehicles from manufacturers. Dealers also typically negotiate the price with the seller and also consider factors like mileage, condition, and demand for the vehicle before purchasing it.
Once a dealer has acquired a vehicle, they will typically perform any necessary maintenance or repairs, then list the car for sale on their lot. Dealers prices are often set based on market demand, competition, and the overall condition of the vehicle.
Before we get into the intricacies of the two kinds of auto dealer licenses, let’s first explain the difference between the two kinds of auto dealers.
Wholesale auto dealers generally purchase vehicles in large quantities from manufacturers or auctions and sell them in bulk to other dealerships or businesses, such as rental car companies or fleet vehicle managers. Their commercial model centers on business-to-business (B2B) transactions, and wholesale dealers often offer lower prices than retail dealerships since they purchase and sell in bulk.
Retail auto dealers sell vehicles directly to individual consumers, operating a B2C business. They may also accept trade-ins as part of the purchase process. Retail dealerships may also often buy, recondition, and sell used vehicles, offering customers more options at various price points. Retail dealers auto generally have a stronger focus on providing good customer service since they are primarily B2C.
If you’re confused on the type of license you’ll need for your intended business, feel free to consult our experts and we’ll be happy to help you figure it out.
A retail auto dealer license, also known as an independent dealer license, is a legal license that enables a person or business to sell new or used vehicles directly to the general public. The license is granted by the state government, and the requirements to obtain one vary by state. Generally, prospective auto dealers are required to submit a completed application, pay a fee, provide proof of insurance, and demonstrate evidence of financial stability. They may also need to pass a background check, attend a dealer training course, and obtain a surety bond.
If you are an auto dealer looking to sell individual cars directly to buyers or if you feel passionate about helping people find their perfect car, then you will likely want to get into the retail dealer business. Because the retail business involves selling cars to individuals in the general public, a dealer in this business should enjoy or excel at personal selling, marketing, and customer service. If this sounds like you, then you are likely more suited to retail auto dealing than wholesale.
If the number of vehicles you plan to sell in a 12 month period exceeds a certain amount, you will need a retail auto dealer license.
Refer to the table below for the threshold number in each state. If the number of cars you sell exceeds this number, you will need to file for a retail auto dealer license.
A retail auto dealer license allows dealers to legally sell new or used vehicles to general public consumers. Operating without a license is illegal, and dealers who do so can get hit with fines, and in some cases, even jail time. The license permits dealers to participate in auctions, secure financing for customers, and offer trade-ins on vehicles. Additionally, the license allows the dealership to register and title vehicles for the customers they sell to. Retail auto dealer licenses requirements vary by state, and dealers must follow their local state code to maintain a valid license.
The difference between new and used retail auto dealers is the nature of the vehicles they sell. New car dealers sell brand new vehicles that have never been driven, while used car dealers sell pre-owned vehicles that may come with some wear and tear.
New retail auto dealers sell brand new vehicles directly from the manufacturer or distributor. They typically offer warranties and service packages, and may also provide financing options. Becoming a new retail auto dealer can be an expensive undertaking as it requires getting franchise rights from car manufacturers. For example, the initial investment required for a Honda franchise is $250,000. In some cases, getting the vehicle manufacturer to grant you a franchise license can be more complicated than getting a new car dealer license from the state.
Used retail auto dealers sell pre-owned vehicles that have been previously owned and driven by someone else. These vehicles may have higher mileage and wear and tear, but they often come with a lower price tag than new vehicles. Used car dealers may also offer warranties and service packages, but they may be more limited than those offered by new car dealers. Used car dealers do not need permission or agreement with car manufacturer to sell their cars; all they need is a used auto dealer license from the state.
A wholesale (franchise) auto dealer license is a license that allows individuals or businesses to buy and sell vehicles wholesale, meaning they can sell cars exclusively to other dealers or dealer-only auctions. Wholesale dealers are not allowed to sell to the general public. These licenses are typically required for businesses that purchase cars at auction or from manufacturers to sell to other dealerships as part of the dealership network. A wholesale license typically requires less stringent requirements than a retail dealer license, as the focus is on selling cars in bulk, rather than to individual customers. Wholesale auto dealer licenses may also come with different rules and regulations depending on the state or location where they are granted.
While wholesale dealers can buy from wherever they would like, they are limited to selling to dealerships, auctions, and other businesses. If you are more interested in the B2B aspect of the auto industry, want to sell cars in bulk, or want to participate in dealer-only auctions, then a wholesale license is a good fit for you. Because wholesale dealers sell to dealerships and auctions rather than the general public, wholesale dealers generally do less customer service and marketing. Most of their job is related to the more operational aspects of running a car dealership such as inventory management, getting spots at auctions, and negotiating partnerships with dealerships.
One thing to note here is that it's much easier to get a wholesale license than a retail license because unlike retail licenses, obtaining a wholesale license does not require the dealer to own a physical lot, which is often a barrier for dealer hopefuls. In addition, wholesale licenses are typically cheaper to obtain.
As mentioned above, a wholesale license allows you to participate in dealer-only auctions, which are auto auctions only open to licensed dealers. Wholesale, dealer-only auctions are the quickest way for dealers to sell their stock of automobiles and source new vehicles to sell. If you’re looking to purchase, the prices at dealer-only auctions are also cheaper—on average, someone could expect to save 20% or more, which is a significant amount when applied to the pricey market of automobiles.
Outside of the perks of dealer-only auctions, a wholesale license allows you to legally sell and purchase cars and other automobiles directly to and from licensed dealers.
The process of obtaining a license is generally the same between retail dealers and wholesale dealers. Outlined below are the basic steps to getting a dealer license.
Refer to our comprehensive dealer license guide for the full instructions and further details.
An auto dealer bond, also known as a motor vehicle dealer bond, is a type of surety bond that car dealers must obtain to legally operate their business in their local state. It is a three party contract where the surety company (the surety) guarantees the auto dealer (principal of the bond) will comply with all auto dealer laws and regulations required by the Department of Motor Vehicle (the obligee). In the event that the dealer fails to fulfill their obligations, i.e., not remitting sales taxes to the government or selling a car without a valid title, a claim can be filed against the bond to provide financial compensation to affected parties. This bond is required in many states in the US as a means of protecting consumers from fraudulent and unethical business practices by auto dealers.
In another sense, the auto dealer bond acts as a filter to ensure that only credit worthy and financially secure auto dealer applicants can be bonded. This is because to get an auto dealer bond, a credit check is required. Some surety companies won’t provide a bond to applicants with a substandard credit score.
For both kinds of dealers, you’ll need to obtain an auto dealer bond to operate your business.
Retail Auto Dealers
For retail auto dealers, an auto dealer bond is required by state laws and serves to protect buyers from fraudulent practices by the dealer. There are usually two types of auto dealer bonds for retail dealers. New/franchise dealers require what’s commonly called a ‘franchise motor vehicle dealer bond’ while used dealers require a ‘used motor vehicle dealer bond’. In some states, there is only one motor vehicle dealer bond for both used and new auto dealers. Check your state specific requirements here.
Wholesale Auto Dealers
Wholesale auto dealers require a ‘wholesale motor vehicle dealer bond’ that is also meant to protect buyers. There is no distinction of new vs. used vehicles for wholesale dealers, so only one bond is required for wholesale dealers. For select states, such as Texas, there is only one bond for all auto dealers, so wholesale dealers end up buying the same bond as retail dealers.
It is important to note that the specific types of bonds required may vary by state, so it is recommended to check with your state’s Department of Motor Vehicles or licensing agency to determine the requirements.
Just like other surety bonds, the bond pricing for auto dealers depends on the state you live in, which determines the bond amount, and the premium rate, which is dependent on your financial statements, credit history, and any past claims that you may have regarding previous auto dealer bonds. Auto dealer bonds could cost anywhere from $350 - $1,000 depending on these factors. If you’re unsure of how much your bond will cost and want an estimate or exact pricing on your bond, give us a call. We’ve helped many prospective auto dealers—both retail and wholesale—obtain bonds quickly at industry low prices. Our forms take three minute form.
For retail auto dealers, new retail auto dealers (as opposed to used retail auto dealers) often get their bond at a lower premium rate than used dealers. Some states don't even need bonds from franchise/new auto dealers.
This is because new car dealers are lower risk, since they have already been vetted by the car manufacturers that granted them a franchise license.. On the other hand, a used car dealer could be a car enthusiast that is flipping cars out of personal passion on Facebook marketplace. Compared to the polished franchise owner, the used dealer selling on Facebook marketplace likely will have more claims on his/her bond. Therefore, the premium rate on a bond for a used car dealer will likely end up being higher than for a new auto dealer.
In summary, obtaining an auto dealership license is a necessary process, whether you’re running a retail or wholesale dealership. This article has walked you through the nuances between the two different kinds of licenses; you’ll now be prepared to undergo the process of obtaining a license for your business!
