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Related Finance Company Considerations: A Difficult Decision That Requires Extensive Review

A Related Finance Company (RFC) can be an advantageous addition to your BHPH dealership’s operations if certain factors are present. Some of the information needed to make this decision is:

•     Prior three year federal and state income tax returns for the dealership, individual owner(s) and any affiliated companies

•     Prior year-end financial statements (balance sheet and income statement)

•     Most current month-end financial statements for your dealership

•     A current installment note receivable aging or list

•     Your static pool history analysis.

A review of your company’s tax returns must be completed to decide if they are setup correctly to complement the RFC. Some factors to consider are:

•     What types of taxable entity are they?

•     Do they have accumulated earnings and profits?

•     Are there any carryovers that need to be considered going forward?

•     What type of tax elections have been made in the past?

•     Are they currently in compliance with all elections and regulations, etc?

You should also complete a review of your dealership financial statements. This analysis will reveal if you have enough cash and liquid assets to help fund the setup of your RFC if necessary funds are not available elsewhere. The type of company tax status may also govern if you are able to use these funds for that purpose. Projections should be completed as if you have sold the notes to an RFC so you can review the effect on net income, cash flow, net worth, working capita, and other factors that are important to the operations and health of your dealership.

If your note portfolio is too small, it may be too expensive to add an RFC at the current time. If your intent is to grow your portfolio to exceed the minimum of $500,000 to $1,000,000 and your dealership is incurring substantial federal and state income taxes, then it may be time to review if you are a candidate for an RFC. Since you are starting a new company with your RFC, another federal income tax return, along with any applicable state returns, will need to be filed annually. If your financial institution requires your CPA to prepare financial statements at year-end or interim periods, additional accounting rules must be followed in their preparation. You may be required to prepare and issue combined financial statements to remain in compliance with GAAP and other accounting standards.

You may have to purchase or add an adequate note receivable collection software program and accounting system.  One that is capable of handling the sale of the note from the dealership to your RFC with the proper integration to save grief in accounting and allow for proper income tax preparation. It is very important that you fully understand what the software can and can’t do and choose carefully. Some software requires you to print all of your month-end reports on the last day of the month before any new month’s business is entered. This allows the software to obtain the correct month-end receivable, inventory, repo loss, discount income and other amounts necessary to reconcile your general ledger accounts on both companies. Failure to do so will leave you without valid detail reports to adequately reconcile your general ledger accounts without a lot of manual work.

You will need to properly train your bookkeeper or controller in all aspects of the accounting and tax transactions that will need to be recorded. They will need to learn how to reconcile the intercompany and other RFC type general ledger accounts and transactions and recognize when they are not in balance. You will need to understand the cash flow needed for both companies to maintain or increase your sales volume and still have the available cash in the RFC to pay its own expenses, any shared expenses and, more importantly, pay for all the notes when they are actually purchased.


Vol 5, Issue 9


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