Advantages of a Related Finance Company
Do you need to have a related finance company (RFC)? If you are considering entering any form of dealer controlled finance, you probably should.
I am not a tax accountant or an attorney, but I do have 20 years of automotive experience, the majority of which is in BHPH. While I cannot sit here and tell you all the ins and outs of an RFC, what I can tell you is that every operation I have been involved in had an RFC established.
The RFC works with your BHPH dealership like any finance company would, except it is a part of your business. The RFC is assigned the loans from your dealership at a discount, and the RFC services those loans for the portfolio. Just like any other finance company, after contracting your deal, your title clerk establishes the lien for the RFC. The RFC funds your retail installment contracts. The dealership can concentrate on selling the next vehicle, and the RFC is responsible for the collections.
This gives your operation a second corporation to help spread expenses and liabilities that come from the credit issues of the BHPH business. There are several tax advantages to having an RFC that will vary by state and the personal tax situation of the principal. Tax advantages are the primary reason for establishing the RFC. With the income generated from a successful BHPH operation, any bottom line tax savings will be helpful.
Having the RFC creates some unique problems for you to overcome. The RFC splits your revenue, which can make showing a profit more difficult for the dealership. Since this is also part of the tax advantage, a balance between the two companies will have to be ironed out. With the two companies overlapping operations, there are questions of employees “crossing over” from one company’s duties to the other. Your people will need to be paid by the company whose work they mainly perform.
In our operation, everyone helps with collections in some fashion, but at the same time they have clear duties that are relevant to the company that pays them. There are aspects of the business, like repossession disposal and funding that go between the two companies that you will have to be aware of, depending on what state you operate in.
From the dealership standpoint, the RFC allows you the “cover of “THEM.” When you turn down an application, you can tell the customer, “It was not us, it was THEM.” When a vehicle was repossessed, it was THEM. When you cannot let the late fee slide or the interest rate is too high, it was THEM.
In Arkansas garnishments are allowed. This created advantages and disadvantages for the BHPH operator. The advantage is that you can be granted a judgment against a customer who defaults. You can then request wage garnishment for that customer, if you know where they work. By having the RFC, you can have a company that has a completely different name taking legal action, which helps keep the dealership name clean of the “bad news” associated with suing customers. The disadvantage of garnishment is that every other finance company in the state can garnish your customer as well. You will have customers that cash flowed when you contracted them but suddenly cannot afford to pay you due to a garnishment from another finance source. Of course, that’s another story.
Like with any business, you need to be aware of your company’s liabilities. Be sure to check out the laws of your state before you set up or change your operation. BHPH is so much more than the “car business.” There are many differences when you are the finance company. There are challenges and rewards unique to our business model that I never experienced in traditional retail.