Wake up, Buy Here, Pay Here people. It's a beautiful day. Go grab yourself another cup of Joe and say hello to Jim and Michelle Rhodes on the Buy Here, Pay Here morning show. Take it away, you two. good morning everyone happy friday run a little bit late here getting set up but uh happy to be with everybody and have an important subject for today uh just a quick note this is uh friday we uh made mention on our wednesday broadcast that today is the funeral for michelle's mother and so we had our viewing last night and today we do the funeral and uh so you know it's somber day and uh I'm uh for me I'm uh I'm kind of obviously off the experience with my mother's passing. I'm doing the best I can to just stay in the mindset of, Gratitude and celebration of the life that was. Thank you, thank you, thank you. That's been my mantra for the last little while. Yeah, for sure. So anyway, personal note, and I don't know that I've got any other announcements. Our schedule is coming together for V-A for the month of September. If you're not currently enrolled with us, we've got a lot of people that are talking to us about V-A, and unfortunately with the funeral stuff and everything this week, I haven't been much available. But we'll be catching up on those conversations next week. And it's definitely an opportunity to get there's time to get into a September meeting. So please reach out right away and let's get you in a group. I think this today's conversation, Michelle, is going to be yet another indication of a benefit that some of our our dealers in a VA meeting will have because they will they will see this before it's a problem. Right. And so this is kind of why our topic today is around related finance companies and and kind of what happened I actually had a conversation a virtual discovery meeting with a dealer yesterday it was pretty sobering and uh so it's like yeah yeah and and it's it's you know one of the things that we've learned an awful lot through the coaching that we've done and um and we've had the privilege of being able to reach people that don't necessarily always come to the the conferences and so they're not getting some of the the um the education and understanding about certain things. Um, or it's just not something that they're interested in and because it's like, Oh, I got this. And, and, um, and it's, so it's, and we hear all the time dealers, just the most, the just most fearless entrepreneurs. Um, I just really, and they just, it's like, I'm going to do this thing and, you know, figure it out. And, you know, talk to their accountants and talk to, you know, all of the things and, and get advice from people that understand not buy here, pay here a lot of times. And, um, and we find frequently when we talk to dealers, especially those that are just starting to plug in and that again, that we have been blessed to reach, um, you don't know what you don't know what you don't know, and you don't know what questions to ask either. And so this is one of those topics. And we know that there are a lot of dealers out there that, that are familiar and haven't. Right. And so this is, and this is also for those of you that have good, you know, that's the, that this, this topic is something that, whenever Jim has helped a dealer get into business, this is part of the launch package. It's like helping them get this set up because it's very important. Yeah, there will come a day that if you do any volume at all, you're going to want to have this related finance company. So why don't we first take a minute, one quick aside before we explain really what an RFC is for those people who may be tuning in and not as familiar. One quick aside, as you know, you talked about dealers don't know what they don't know. Sometimes there's an element, and I think of a dealer that I worked with years ago. He was our dealer principal when I was a young salesperson, sales manager. And watching him operate reminded me of the kind of the bull in the China closet thing. Go, go, go. Bang, bang, bang. Do this thing. And we'll easier to beg forgiveness of retail. Yeah. But it's also we see it with by your payer. And this is no indictment as much as it is. Sometimes the the attitude and part of what makes us successful sometimes is. we think it's easier to beg for forgiveness than to get permission, right? And so this is one of those areas where this dealer wished they had done. They will end up doing it this year with me or with somebody else. They will do this year what they could have done last year had they just known maybe they didn't know, as you said, they don't know what they don't know. Maybe they knew and they kicked the can down the road and said, I'll deal with that and I'll just beg for forgiveness. IRS does not care about Yeah. And so, so let me just tell them quickly this story about this particular dealer. This, so for, I guess, let me, let me first just kind of highlight what the RSC is. So for those listening and hearing it for the first time, a related finance company is a provision that was established by the IRS a long time ago. It's, it's out there, there are codes around this sort of thing. And it's really meant for, is set up for situations like a buy here, pay your business where they do installment sales. They basically because when we do an installment sale and buy here, pay here, we buy a car for six thousand, we sell it for ten thousand, even though we only get a thousand down or actually five grand negative, we're actually going to be taxed based on that four thousand dollars of what we call phantom profit or paper profit is profit on paper. But in the IRS calculation, that is profit you owe income tax on. So let me ask you this, you know, like we bought a Nissan years ago and we made our payments to Nissan Financial. So I don't believe that, I mean, that is a related finance kind of. It's a little different. They're more like an indirect party, but you're right that, you know, you had a sales department and then you've got to finance it. It went to Nissan finance. Right. But Nissan in that case is more like an indirect lender. In our case, it's a different, it's a related, the key word here is related. Like it's a sister company. And so because of that, there are rules that this thing was established, but what the IRS doesn't want is us just kind of, doing funny stuff with our numbers and moving money out of one pocket into the other in order to avoid taxes right that's what their job is to make sure people are fair and pay taxes when they generate income so there are very specific rules around this and sometimes we can go into some depth around those if it's necessary but I would just say that It's important to involve somebody who knows how this works because, so do the story from yesterday. I get a dealer who reaches out, hey, aren't you someone who could help us set up an RFC? And I said, yes, I actually enjoy doing it. Let's talk about it. We opt on a virtual meeting and ran through the stuff. And this dealer shared with me, it's not important who they are, where they are, but this dealer shared with me that they now have about a three million dollar portfolio. So I don't know. I don't know their history. I don't know how much they sold in twenty four and how much they sold at twenty five. What I do know is he said, I owe the IRS about three hundred thousand dollars. This is according to my CPA that I've had for a long time is a very capable CPA said, according to your your taxes for twenty twenty four, you owe the IRS three hundred thousand dollars. He said, I don't have it. So this is, this is, and I just wanted to make note that Hugo Sanchez is listening. He's like all eyes. Hugo is from the accounting firm, Butler Sanchez. And they just a side note by here, pay your dealers. most regular accountants do not understand this business. The RFC piece. A lot of them don't understand buy here, pay here too. There's some elements to buy here, pay here by itself. Reach out to Butler Sanchez, reach out to these other firms that are, there are others out there who are also interested. BHPH specialized. And you know, there, there are elements to this. So, so let me just kind of share the conversation I had with the dealer yesterday. I just explained to him, my role is typically, I call it a liaison role. Like I'm a coach. Who's not a CPA. I'm not an attorney. Yeah. I'm somebody who understands always disclaimering that yeah it's like talk to your local state association yeah yeah get some legal help if it's a legal question ask an attorney yeah so we we know not to step into that however we are experienced enough as coaches um me this is not your expertise but I'm experienced enough in this area and I owned a related finance company learned a lot of accounting And as a result, I'm able to serve as a capable liaison between the dealer and their software and their CPA. Because even if the CPA understands RFCs, they don't understand the software. And the dealer probably doesn't understand the software as it relates to an RFC. So my job is to get on the scene. One of the things I did yesterday after the meeting, dealer shared with me who their DMS was. It was somebody I've never done an RFC with. So I had to reach out and find out What's that going to look like? Because in order for me to prepare a proposal for them, and this is something to think about, folks, in choosing a software, it's like, here's your reality. If I'm going to step in and help you set up your RFC, what software you're on is going to be a big factor. Some of them are easy. Some are not easy. We talk about that when we put dealers and help dealers establish a business. Um, the, the, you know, it's, it's like, it's funny cause dealers want to go after all the bells and whistles and then keep things as cheap as possible on the, on the, the software. And it's like the software should be the thing that is like. the foundation of everything else that you lay into it. It really is the backbone of so much. It could be, it should be. With good software, it should be a capable backbone. So you start to get into all these things about, so I really haven't still explained about the RSA. So a related finance company. is an entity that is a sister sort of entity. And basically what happens is the dealer is able to sell from their sales company these contracts in bulk and, you know, take an entire portfolio or some portion of a portfolio and sell it over to the finance company at a discount. Why the discount? Well, because The finance company is inheriting the risk. So now they buy it at some reduction of the price because of that risk factor. Right. And so now the dealership gets a check for those contracts and the dealership goes on and buys cars and sells cars. And then they have an ongoing understanding. We typically help dealers Draft a dealer agreement between their sales company and their finance company so that there's a set of rules in there. Because there are some things you need to satisfy with the IRS if they came knocking on this, but also just internally procedurally. Regardless of whether the IRS ever shows up to audit, there are some procedural things that we need to have in place to help the accountants do their accounting on the RFC. Okay, so this is the part that we know. We can get into the software, we can help the, and typically when I help with these, we are walking the dealers through their first few months of financials. Okay, we actually stay there in the financials with them and make sure all the parties involved understand here's where this number comes from, here's where this number comes from, and now we've done our RFC accounting. The dealership side is pretty easy, but just helping them make sure they know how to kind of follow and find those items in the software that will drive the journal entry. So back to the RFC definition, it's like it's really just why sell those contracts at a discount? Because the finance companies tax differently. It doesn't experience income until it collects payments. And for dealers, this is like, for me is one really big reason why a dealer should have an, and we, I don't use the word should like I used to, um, we strongly, strongly, strongly advise should. have an RFC is because it is taxed differently than a dealership. Yeah. And so, so let me also say who needs one? Well, if you're LHPH, you don't need one. Okay. Lease your pay here's taxed differently. That's part of the reason people go to lease your pay, right? If you're, but if you're straight buy here, pay here, retail installment contracts, when would you need one? Well, I know I hear CPAs give their answer for when and why. I, my answer might be different. I think every situation will be a little bit different, but generally speaking, one of the first things I'd look at was software, you know, because I used to, I tell people, if you'd asked me this question, my answer might've been different today. Software is better. So our ability to flip the switch on the RFC is a little easier with some than it would have been before, because before I would have said, man, you got to do it, but it's a huge thing. You know, let's, let's do it. We have to do it. Most of the softwares out there were just automotive softwares, weren't they? And so there have been more softwares that have come into the market that, that are, that they have buy here, pay here specific ways of doing it. Yeah. And I won't say the name of the company, but the DMS that this dealer is on, they shared with me yesterday in a chat thread that if the dealer has their software, their dealership sales software, which is also buy here, pay here, it's running their accounts. But if that dealership has their software integrated with QuickBooks, they can't transfer contracts. they kind of have to rebook them. And they're like, that would be a big mess. So it's like, so I have to undo my QuickBooks in order to, right? So this is where you start to learn. So I always try to tell people, this is the stuff you have to know. You don't know what you don't know. You don't even know what questions to ask you when you're starting into choosing software. You don't even know what you're going to need to know at that point. And so this is why it becomes important to think about these kinds of things. It becomes really difficult for a dealer to, To flip the switch. And that's unfortunate. You know, this dealer was the first one to bring up yesterday in our conversation. You know, I need to change software. And I'm like, man, I'd hate to see you change software and add an RFC. That's a lot. I mean, we have plenty of dealers we've worked with that have gone through the software change. And it's months. It can be. And I'm just saying, I told him, I said, I would not advise that. If we can avoid that, I would not do it. But guess what? In this case, that may be the outcome. The dealer may be between now and December thirty one choosing a new software and setting up a whole new thing and could just set up the RFC. But imagine what it looks like in a good software. You flip a switch and you set up your related finance company. Now you transfer those contracts at a discount over to the related finance company. Now, tomorrow, Mary Smith comes in to make a payment. And all I have to do in the software is look up Mary Smith, post the payment and the software takes care of all the rest. It knows the rest of it. It knows all the rest and it handles all the rest behind the scenes. It doesn't even know which sales location. It's some of the stuff. It's like, it's just hard for people to really think about. And so, you know, they're just looking at, sometimes I hear people say, you know, these people are pretty happy with their software. And I would say, well, they're more happy with their invoice than they are their software because they don't know what they're missing. They don't realize how much effort they're putting into, uh, day-to-day that other software would handle for them right it's like what is the time of you and your staff worth to you yeah and that's not our purpose here today but I just mean wow it's like this so let's talk about a couple things so so number one you got that so our of our five reasons of of the three hundred thousand which obviously now you know or three hundred thousand was this dealer has three hundred thousand reasons that he would tell you that he wish had done it last year Yeah. Okay. So he procrastinated. I'm not saying that to pick on him, embarrass him. Like we're not saying their name. I'm just saying that dealer would tell you if they were sitting here today, I wish I had done it last year. He's not the only one. Why didn't he do it? Because the CPA, his CPA didn't know to do it. Yeah. His CPA didn't see it coming. Yeah. Right. And so why? Because they're not in that space. And so this is why, you know, this dealer suddenly sitting with a tax bill. Will it work out? I'm not the tax professional. Like that's up to them to figure out what they're going to do with know but I can tell you we can solve that in twenty twenty five but we can't wait and this is why we think it's important right now in early september you have this conversation make this decision like right now here's why we're going to give you these reasons why you don't want to procrastinate on this decision in some states licensing could take a little while you're going to need to be properly licensed in your rfc you got it you're setting up a new company it's going to be a finance company It's got to be licensed right. This particular dealer, it's a pretty simple filing process in their state. It won't be a big deal for them. That won't be a source of delay. We have seen others in some states, but there's so many more regulations around that. You're not a legitimate company until you're properly licensed, and so that can take some time. And this is why you can't wait and decide this thing in November. And here we are. We haven't even closed the financials on the third quarter, but I'm saying decide now. you can project your third and fourth quarters and say, where's that going to leave me? And I didn't finish saying earlier, Michelle, that my answer might be a little bit different in terms of when to flip the switch on the RFC, because I think for me, Because it's simpler with some software, my answer might be earlier than others. You know, pretty commonly I've heard you want to have about a half million in receivables before you can justify doing that. I think I think I could justify doing it with less than that if there were other mitigating considerations here. Right. So that's the importance of talking to someone who understands all of these things. And so, yeah. Like if I've got a, let me just, if I got a three hundred thousand dollar buyer payer portfolio, I'm mostly a retail dealer, but I have three hundred thousand dollar portfolio. Is it worth setting up an RFC? I don't know. Ask your tax person. Would a hundred thousand dollar adjustment, rough numbers, would a hundred thousand dollar adjustment to your income this year help you? If the answer is yes, then you got to look at what it's cost for me to get to that hundred thousand dollar discount. I'm just picking round numbers here, but what would it, what would it take for me financially extra set of financials, you know, setting up a new entity, you know, maybe some software adjustments, whatever. But I just think, you know, if, if software is difficult and that's one thing, but you know, there's cost of extra financials and some of these kinds of things to consider. But, but I'm just saying that's reason number one is licensing. Number two, lenders we want to also give our lenders if you've got a lender in the picture you're going to want to give them a little bit of time to also make adjustments in their agreements with you because they're probably a good lender certainly a lender who knows our space and who's really expected to be with you for the long term is going to understand why it's essential for you to set up an rfc now you're um there are dealers out there that have enough equity with their local banks that they have their financing through them. So that may take them a little bit longer to, to understand and be able to do that. But really what we're talking about is who holds, you know, thinking about what it looks like to your lender when you, they, they have a loan outstanding with sales company X, and now suddenly all those contracts belong to finance company Y. And so, you know, like this is why it's, you need to allow a little time for the lenders to adjust their documents and, and, um, you know, kind of expand their agreement to a more global understanding. And I went through that with my own dealership years ago, and they were quite accommodating. We made it all happen pretty quickly. But you just need to allow time. We can move on to the next one. All right. So the next one is potentially high price of procrastination. Actually, let's do this one first. I just read a minute order on the thing. Number three is the time involved for the software. Thank you. Because you may be looking at a software change here. You need to be aware of what your software will and won't do as it relates to this finance company thing. And with some of them, like I say, it's not a hard deal. I can do it. Add me as a user. You get the finance company added in the system, and I can help have the RFC set up in a few days. I mean, fully set up, fully contract transferred. First round of financials, you know, kind of buttoned up at the close of the month. And so with some, but with other software, you need to make sure you know what your software will and won't do. And, you know, it's going to be hard. Your CPA probably doesn't know your software. You might know your software, but you don't know how it handles an RFC. And so we need to understand the mechanics of what's going to happen and not just the mechanics, but the accounting. Like we know how we're going to move the contracts, but where's he going to pick up the discount income and all these kinds of things that we're going to have to have on the other side. And this is the part that just takes a little time to figure that stuff out. So we can't, we can't put this off too long. So number four, potentially high price of procrastination, obviously these fees, right? The penalties with the IRS, this dealer is potentially going to pay a really high price. I mean, we know there will be fees assessed if they don't pay them. They've already passed the time when they should have paid the taxes for they may file an extension and they may have some adjustments or whatever file but they're still supposed to pay as we know we that's only an extension of time to file not a time to pay so so that dealer knows that's how much they owe so they're probably going to be penalties involved know will it get worked out in the end can't say but there's a real price for that dealer for and this dealer just simply may not have known last year because their cpa didn't give them a heads up and so this is you know the price we sometimes pay for being with somebody who's good and we like them and they know accounting and they can they they have a shingle that says they're a cpa but that doesn't mean they can do the stuff that they and it's not it's okay they just don't know this particular discipline right this particular field so Number five, a reason that I always try to throw in there with RFC is that another benefit of having an RFC unrelated to all these tax strategies that we're talking about is once you set up an RFC, you really probably just need one. And so you may have two, three, five sales locations, and you can still just have the one related finance company, which is going to hold all the contracts. So whether we're talking about a traditional lender, institutional lender with line of credit, or whether you're talking about a private investor who's gonna come in and invest in the company, most of them would invest in the RFC. So it's a good instrument to kind of centralized account management, asset management, and be able to do some investment over there. So there's some benefits for some, it's a smaller percentage of people who would be seeking to grow and capitalize, But this is this is primarily first and foremost is a tax strategy. It's a way to move income legally to defer income on contracts that we sold now or that we originated on the buyer payer sales side and move that over to the RFC so that we can we can write off. We'll show a straight write down on whatever those contracts are. We discounted them or whatever that discount is. That's going to come as a straight write down on our sales company over to the dealership or to the finance company. And now that finance company will not will not experience income and will not owe any resulting income tax until it has collected payments. That's the big difference in why the RFC even becomes a thing. So, you know, there's just a whole lot to think about there. And I would just say that it's important for dealers just not to put this off. It can be a really expensive, you know, procrastination. It's the time of the year too. So if it's something that will help you, for your taxes for twenty twenty five. It's now. Let's get on with it. Please don't call me in late November. So holidays. And I'm just saying I'll do the best I can. But it's like it's just no guarantee if you do need help. Um, with that, or with anything else that you know, that, that we, um, that we offer help in, um, please call or text us the, um, nine Oh three eight one six Oh two one six nine Oh three eight one six Oh two one six. Um, jets, gyms, cell phone. So call or text. And the cool thing is, is that our industry is small enough that we can do that. Yeah. Um, so, uh, anything else? No, I think that's it. I mean, there's a whole lot more to explain and unpack around an RFC, but we did a podcast on RFC before, but not the urgency and the time of the year kind of thing. So it's definitely time to get in there and get that figured out. Yeah. All right, everybody. Happy Friday. I hope you all have a great, great weekend. You know, we're just coming off. It's the weekend after Labor Day. So all the kids are in school. Yeah. People are settling into, to just their rhythm and holidays are right around the corner too. And by the way, quick shout out to Tommy Brandis, his Philadelphia Eagles beat the Dallas Cowboys. Congratulations, Tommy. Way to go. All right, everybody have a great rest of your week and we will see you on the other side.
