1. Defer taxes:
Related finance companies help dealerships improve cash flow by deferring tax payments. An RFC allows the dealership to pay tax on the profit of a sale as payments are received rather than upfront at the time of sale. Here is how it works.
For a dealership without an RFC a sale of a car would look something like this:
| A dealership sells a car |
$9,000 |
| The dealer’s cost of the car |
($4,000) |
| Overhead of the dealership |
($3,000) |
| Taxable Profit |
$2,000 |
With an RFC the dealership would sell the note on the car to the RFC at discount for $7,000 and recognize a loss of $2,000 on the sale of the note. This would reduce the taxable profit for the dealership.
The RFC now owns a $9,000 receivable which it only paid $7,000 for. The $2,000 difference is deferred revenue which the RFC only needs to recognize gradually as the payments on the car are received.
2. Avoid licensing and other regulatory requirements on the dealership entity:
Many states have licensing requirements for finance companies. Establishing an RFC permits the dealer to isolate liability for violation of any requirements in a separate entity without jeopardizing the status of the dealership. In addition, some states have capital requirements for finance companies that may interfere with the normal operations of a dealership.
How our Software Helps
For legal and tax purposes the car dealership and the related finance company must be two completely separate entities. MSP software allows you to have two completely separate databases for each to be in full compliance. MSP software also allows you to seamlessly sell notes and transfer accounts from the dealership to the RFC.
