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. Yay. Happy Friday, everybody. Good morning, everyone. Yeah. Yeah, Friday. Day after Halloween. Yeah, the Halloween hangover day. This is Day of the Dead. Oh, I don't know anything about that. And it's a big thing. deal for our Latino friends. Hispanic culture? Yeah. It's kind of a day when they connect with their ancestors and it's a day that they pay homage to those and that they believe that the the souls or the spirits of their ancestors can come visit and so it's it's a pretty big deal but so it's uh the day after halloween and we survived we had two people or two groups show up at our house last night which was one more than we had last year we were uh we started getting um towards you know it's starting to get dark and I said honey do we have any candy yeah Because we don't really decorate for Halloween. You know, neither one of us have kids. And we don't live in a neighborhood that there are really any young children. No, I've eaten all the candy. And so, yeah, you'd already know. So Jim went to run to go get some candy. And good morning, George. uh and yeah we just like the first group that came were a bunch of teenagers they were really really cute but jim sat and struggled with getting this bag of candy open for them and so he like handed them the candy the bag he says you guys work on this he went inside to get a pair of scissors one of the people got it open and they're like we got it so it's like handful handful handful because no one came so now we have all this candy that we will be uh Consuming. Yes. Slowly. Slowly. Yes. Yeah. Okay. What other things do we have this morning? We don't want to forget to remind folks, we're like a week away from the NIADA Super Forum in New Orleans. So post that on the screen for folks can still get registered for that. And we're hearing a lot of people planning to attend. I've had quite a few people on social media asking me, you know, if we'll be there and we won't be there, but I'm glad to hear that a lot of dealers are planning to attend. Absolutely. Yeah. We're like, you know, we, we, a lot of conferences dealers will ask, are you guys coming? Are you guys coming? Are you guys coming? And we just, we've been of the, of the, the camp that we're forging new trails for virtual tracks and, And, um, unless like we're asked and speaking or something like that at a conference, we just, you know, we just haven't really, it hasn't been, uh, uh, uh, something that, that we've been doing. Cause it's like, we're... yeah people reach us through virtual track and then the national conference will be at every year because that is um that's the big one so you know maybe I don't know the the super forum is about buy here pay here and the morning show is about buy here pay here but we won't be there this year maybe next year um okay so and otherwise our dates are all set for our v-eight meetings including our v-eight plus session great meeting yesterday with brent carmichael yeah joined us for the uh The eight plus session on collector pay plans. I think that it looked like I got a calendar invite from you for November. You're doing another one with him the week before Thanksgiving. And this one will be around sales pay plans. We're not going to set the topic yet in case something else emerges that's more important. But yeah, right now, if it was decided today, it'd be sales pay plan. Okay. Very good. So yeah, there's room if you all are interested in super economical and lots of great discussion and content and all of that. And it just meets you where you're at. You don't have to travel anywhere. You can sit with a kid on your lap or from a baseball game or eating your dinner whilst having a conversation with other dealers. Absolutely. Yeah. Shall we? I think we shall. So this topic, it comes around about this time every year. It's because this is the time of year that a lot of people that understand an RFC are are looking to do that for the tax breaks for the, the year. So, and, and, you know, we're working with some dealers that are getting their RRFC set up. And Jim has been around this topic for decades and always says, I'm not an accountant, but I've trained a few in RFCs and understanding. It's mostly true in that we meet a lot of CPAs, especially local CPAs. Can you help my CPA understand this RFC that we're setting up? It's a local person. There's a very small handful in this country of CPAs that are experts oh sure at are at buy here pay here period well and then when you add the rfc and then when you add the rfc element there are elements to this rfc thing that are different and I learned it just because as a dealer I had a related finance company and I just I wanted to know it frontwards and backwards I got in and learned it wanted to make sure our books were correct and and so you know I had a couple accounting classes in school and so it just kind of helped me make sure I i you know, understood all the pieces. And I, uh, so I, I got quite familiar. And well, the accounting side of the, this is just one piece of all of the stuff in the accounting side. Um, there are a lot of dealers that we work with that have their family accountant. They've been with their family forever. And so I don't want to change accountants. And, and I, I have watched Jim, uh, with more than one dealer to step into meetings with their accountants. And it's just like, let's walk you through, not just RFCs, but by her pay here in general too. And before we get into all that, you know what she's talking about, I have set up, I kind of describe myself as a liaison and the work that we do in related finance companies in particular, I tell them, look, we're not attorneys, we're not CPAs, but we can serve an important role to sit between the dealer and their software and and their accountant, their CPA, right? Because the CPA doesn't usually understand the software, like the DMS, right? And so we typically have some experience there, but we can also help the dealer learn the language, the key stuff, and their team. A lot of times there's a controller, office manager, and a picture. So let me ask you something before we totally dive into this topic. Is a CPA, when there's an RFC involved, typically in a DMS? I doubt it I mean I think that varies okay I think that so when you say you're a liaison it's not with the cpa and the dms it's the dealer and the dms and then the dealer and the cpa I mean it's very when I'm involved it's very open communication with all of them so that I'm telling everybody one time here's the entry that you make based on what's coming out of the dms This is about monthly journal entries and that kind of thing. There's elements to this that are for dealers that have not done this. There are elements that are new. From what I understand, because you're talking about taxes, there are pieces of it that are important for you to do right. Jim Collison, Absolutely. Yeah, absolutely. And, and so I think we, we talk in the morning, every morning, and Jim, actually, we were taking notes, and he's like, Do you want me just to make a photocopy of this? I'm like, please. So we're going to start with first what it is, and with the understanding that a related finance company is not something you need for LHPH. Jim Collison, Correct. Okay. Leaser pay here is taxed differently. It only experiences income as payments come in. Okay. So that's the same thing with a related finance company. That's why we set up a finance company. So why don't we cover that part first? It's like, you know, why would it be necessary? Well, dealers in the buy here, pay here space. And I'm going to speak to this subject today. thinking about those many dealers that we meet that are just brand new in the business, and they're starting to do enough volume that it's time to make that decision. And I actually talk about RFCs throughout the year and working with dealers that are new. When we're doing cash flow projections for them, I will show them as we do these cash flow projections. You can, in my modeling tool, you can turn the RFC on and off. Okay, so first off, RFC, and when I joined Jim, the acronyms just about like made me want to go take a nap. RFC is called a related finance company. And a related finance company is a second company that you are setting up for kind of tax strategies, um, more than others. Yeah. There's other benefit, but the primary one are for tax strategies. Um, so related finance company, RFC. So when you hear people and I, you know, it's one of the things that we've, we've talked about a bazillion times, not really a squirrel, but kind of is putting together a dictionary of terms because there are, when we get new dealers that are coming in, they're like, uh, And we're just, and we forget sometimes that we have to go back and it's like, what are these things? So, related finance companies. So, I think the key word in that is related because, you know, there are plenty of finance companies around, but the IRS has special provisions. They've been around for decades. This is not new. And it's kind of scary to some people because they sound like we're playing in a gray area and that we're doing something a little, you know, under the table. And it's totally... It was a provision set up by the IRS to allow dealers to have this situation. Well, and you can say, is it whatever? But when you think about bigger companies, and I know a lot of dealerships don't consider themselves bigger companies, but dealerships have millions of dollars that flow through their company every year once they've established themselves. That's more money than a lot of other companies do. Yeah. And I think you say the money flows through. There's a lot of paper that flows through that's not cash, right? stack how things move so that they don't have as much taxes. Well, this is a tool the IRS created for this. Yeah. So it's when we say related, I often use the word sister company. It's like it's a it's a cozy situation. It's a company that really is there to serve us, you know, and to kind of serve the enterprise. But, yeah, it's primarily for taxes. So let's just break it down for people that are listening to brand new and especially people that are contemplating buy here. Like you're. So when you originate a contract in a buy here, pay here environment as a retail installment contract, then the profit that you would experience in that transaction, even though the dealer may not get enough down payment to cover their costs, they typically don't, right? That's used to happen, but not anymore. So, so now you've got, you've got negative cash, but you've got profit on the books from that sale and the IRS under typical, you know, convention or whatever they would be you would be taxed as a dealer on that income that you've not yet collected so that's why it starts to become called phantom profit or paper profit it's it's profit on the books but it we can't spend it it's not in our bank accounts yet and so this is why it's so challenging for dealers to be in the buy here payer space because not only are they taking the risk with the customers and their contracts but they have all this this phantom profit and the IRS is going to hit them hard on that. Yeah. So, and, and, um, one of the, one of the things that I've, I've watched dealers and you correct me if I'm wrong, which you do really well, grace, gracefully, um, that, uh, there are a lot of dealers out there that will sell their notes, uh, to bring money into their dealership, and so it's a full sale. But then they don't understand why they're only getting a certain percentage of money for the full paper value of their notes. Well, this is basically selling your own notes to yourself at a discount, so you're not taxed for the full amount. So would you, if you're in the habit of selling notes, would you need an RFC? Probably not. Probably not. If you're discounting those notes, this is an income question. It's like how much income is left over after the sale and after discounting those notes. That's an actual local CPA question. Because now you're really kind of dealing almost in cash. And so now you've got real income and the means to pay it. So it's a little bit different in that scenario. But with the RFC... I can say that we kind of cover this thing about what is it. We kind of know it's a sister company. There are special provisions. The main thing I would say about that, we don't have to go into details about how this thing needs to be structured today. We can bring that back and follow up if there's a need, but there, we have to create a company that has an arm's length relationship because it makes sense. If you think about just logically, the IRS is not going to allow us to take money out of one pocket and put it in another pocket and say, Oh, I discounted the notes to myself. And so I don't know the tax. Well, let me, let me clarify something that I, you know, my brain works differently than yours, which is good because some people get two different perspectives is that I, I do this. I know, a menopause brain. It'll cut you. As soon as I'm in the middle of the next sentence. As soon as you're in the middle of the next sentence, it'll rotate itself through again. No, it's all right. So let's go back to... What is an RFC? So let's talk about the part about when do we set one? Like when and why? We've covered why from the text that she remembered. I remembered. Oh, good. um why discount notes and and you know for new people this is something that they they are um aware of soon after starting is that even though you on paper have a vehicle that over time is supposed to bring you x amount of dollars we all know you will not bring in x amount of dollars but the irs doesn't know that And so the IRS is looking at it as a full value thing when we know full well. And who the heck wants to pay taxes on something you know you're never going to collect? Absolutely. And that you haven't yet. Even the part that you will collect, you haven't collected yet. So that's why there is an RFC. So I'm hoping that there are a lot of very new or people that are thinking about getting into buy here, pay here. To understand that about this business is you don't collect a hundred percent of paper. Sure. And so an RFC is a way for you to discount that to what it is that is. And actually, Karen Barnett, good morning. Amanda Sanchez did a video on that that's free from the boardroom. And it's kind of to educate you about that and about. And I'm pretty sure Amanda says, what is the amount or the percentage that you can? Because there are some dealers out there. I'm just going to do fifty percent. Well, that's not how it works. Yeah. Yeah. Yeah. You know, this is why you want to get professional help. You don't want to get some of this stuff wrong and have to go back and undo it. So, So back to why, when, when, why and when to set one up. Okay. So we've covered the why to some extent, like we want to, because we need to discount these loans. Okay. Some of the other reasons that you would do this is capitalization, like your ability to get funding and whether that's through banks or partners, you know, investors, having a centralized finance company, one finance company can fund multiple sales locations. So if you have multiple locations or are thinking about doing multiple locations, then it's just like one entity that you have to do your taxes for, for that, for the money. Well, you do taxes for all of them. You only capitalize. You only capitalize. Okay. So, all right. But it reduces the income tax of all those sales locations because those sales locations are all discounting their notes to the finance company. And then the finance company handles all the collections and takes the risk. Yeah. The dealer is sort of out of the picture from a cash perspective or from a note perspective. They transfer or convey the contracts over to the finance company. So they're kind of out of the picture. Okay. So this all sounds great. Okay. I mean, it's like, okay, why wouldn't you? And something we were talking about this morning, the why and when to set up is that... Well, you haven't gotten into that, but that... I was, we were talking about how it's just, it's when you're brand new, it's, there's so many things that it's like, wait until, wait until, but when you're brand new, when should you set one up? What, what is like the trigger that's going to get you to do that? Because it's not something you do usually on the front end. Okay. Um, it's something that you do once you're in flow of running business. And I think my answer on that is different than it was twenty years ago. And my answer on that is different maybe than a lot of CPAs that would speak to this. So my, I think there can be situations where a dealer can justify setting it up or allocate. It depends on their capitalization and their volume and all these kind of things can, and, and their, their funding structure. Like if they're private investors in the picture, it may make sense to set up an RFC. Immediately. Yeah. Yep. Because you know you're going to have enough volume and you know you're going to have enough income to need to discount at some point. But because there's these other elements, not to mention just the learning curve, right? Get in there and get familiar with it before you actually need it. So I think this is something that my answer for when is combination of when will the The income tax benefit, the actual write-off that you experience from transferring those contracts the first time, when will that write-off be easily, will that easily overcome the administrative costs of going through this process? Cause it does cost something to get this set up. There's licensing, which we'll talk about. There's, there's sometimes there's software considerations here. There's actual steps that you have to take to, to look like a second, second company. I mean, there's some actual, again, I don't want to get too detailed in the minutia here, but that's why for me, the win is really, so let me make sure dealers, let's pick a thirty percent discount. Pretty common across the industry. Like I'm going to discount my notes. Um, Well, if I'm, if I'm a new dealer and I have, you know, I'm heading into the last of the year and I don't have a hundred thousand dollars in notes and I sell those over to my finance company, I'm going to enjoy about a thirty percent reduction. in my income on my dealership in this calendar year or this fiscal year. So as long as it's done before the end of the fiscal year, that you can leverage those benefits for the entire year. Correct. Even if you've been doing quarterlies. I mean, well, not even if, but that's like the final thing for wrapping up the whole year is it can be something that's retroactive from what you're doing quarterly for that first year. It's going to hit your profit and loss report for that year. For the first year. After that, it's like you're always, your quarterlies are always in the RFC. So that's how you're doing. So in the grand scheme, that's, you know, thirty thousand dollars reducing your income by thirty thousand dollars and maybe reducing your income tax ten, fifteen thousand. Maybe it's worth it. Well, yeah. But the reason my answer is different now than it was twenty years ago, it's a much simpler process now with most with a good DMS. And this is where you start to separate. This is why we see a lot of dealers out there doing a budget, you know, sort of system for their RFC. And then when it comes time to set it or for their dealership, and then when it comes time to set up the RFC, this is one of the areas where you start to separate. Well, and this is, you know, when you're talking about DMSs, this is when we were coaching new dealers in that. You know, we've mentioned many times on the show that the first piece, other than their location and the name and the business license, is what DMS are you going to use? And so the conversation is around what things do you want to be able to do? And then we'll advise around that. you're not thinking about this right now or the, but so, and then looking for a DMS that can do those things. And then the DMS that, you know, and then once you've chosen that, then you choose the things that the, the, the layovers like, GPS and you know underwriting that integrate with that so that it's it just you know everything can kind of play nice. So when I'm working with a dealer that's new I say depending on what they tell me they're looking to do volume wise and how they're capitalized I said well let's let's think ahead to we don't want to choose a software that we're going to outgrow and Because even though that's also better than it was twenty years ago, the conversions, it's still a mess. A lot of headaches, a lot of delays. We did a show a little while ago about what does it look like to divorce your DMS. And some of them are gracious, and some of them are not. And even if you're not divorcing, you're just trans, you're just migrating to a new system in a way. I mean, it's not necessarily an unpleasant thing, but if you move to a new DMS, it's almost always painful. Yeah. So the point is, is that be very, very aware when you're choosing a DMS because this RFC question will be woven into it. And they're just, they're handled very differently. Sometimes it's a separate subscription, which means. Again, we don't need to get too far in the minutiae, but all the stuff about how these contracts transfer, what is the actual process, and how clean is it, and how much of the accounting does the system help with in terms of how it handles the books for this stuff. There's been some circulating questions lately about... DMS and accounting, like, should I have my accounting in-house on my in my DMS or should I have it outside? And, you know, I'm generally a proponent for having the accounting outside, just export from your DMS so that you can take the data to whatever accounting system you want. And if you change accounting systems, then you you don't change your DMS, right? You can just move it over to something else. So that's generally what I prefer. But we're still counting on If we have both our dealership operation and our finance company in the same software, then we're going to be counting on it to produce the necessary journal entries. And even the best systems, I got to say, and I'm sure Amanda and Hugo and the experts out there can back me up on this, even the best systems out there, I find that They don't go all the way on the RFC accounting. Unless it's improved since the last time I was in one, they only do about ninety five percent of the accounting. And there's some pieces that they just kind of leave undone. And so when it's a DMS with the accounting integrated into it, is that what you're? No, I'm saying the DMS system to export. Like if I have a dealership and an RFC and I'm pushing all my data to my QuickBooks or whatever. then there's still some work to be done on the RF or on the accounting side because the DMS doesn't do it all. I wonder if that's part of what the conversations we've had with Amanda. And those of you who don't know, Amanda Sanchez is, is one of the, the it's really well known and respected by here pay here accounting firms. Um, and that's what they do. That's their specialty. That's where they live. Right. And so, so they know that stuff really well. And so that's why you want to choose in a situation like these, you want to have people who can do this. yeah. Well, which makes me wonder, cause when we've talked to her about that and she's, she's, uh, She's getting a new client and then going back and looking at their things. I'll have to ask her, but she's, she's more than once said, Huh, your accountant that you had, you know, your family accountant that been with the family for, for whatever, how many years? Well, you're about X amount of dollars behind, um, on your taxes. You owe X amount of dollars more than what you think you do. And I've heard her talk about millions. Yeah. of dollars if it's not being done. Because if you've got an accountant that's just pulling those things and only getting the ninety percent of the stuff, I wonder if that's part of what attributes to that. Yeah, and this is something that I'll say for the CPAs, but my information as a consultant advisor who's on the periphery of a lot of this stuff in accounting, it's been my understanding that we're not allowed in buy here, pay here to do loss reserves. Like I've seen plenty of financial statements over the years from dealers where their accountant has said, well, we'll just reserve for the losses. We'll just allow for them in the budgeting on the P and L we'll create an account and we'll set up loss reserves. But my understanding is that's not really permitted by the IRS in our situation in buy here, pay here. And a regular accountant wouldn't really understand that. And so I think this is something that this is where you start to separate. And this is where you can, you know, can you, can you, can you get by until you have an irs audit I suppose but you know this is um this is part of what we uh we advocate for just just doing it right it's not that difficult it's really just not as difficult as it once was and I would say the the better software you have the easier that is so you know it's just uh it's a matter of knowing the pieces yeah and um the liaison piece I think one of the things that i try to do with the, when I do an engagement to help somebody set up an RFC, which often is included when we do a launch and we start people from brand new, it's a part of the engagement whenever they're ready for it. Even if it doesn't happen in the first year, it's just part of that engagement. And I typically support them through their first two to three rounds of financial statements after the RFC is in place. So there's just making sure it all kind of ties together and that they all understand the moving parts and that we're getting all the entries located in the DMS and that we you know, kind of have the hang of that part. And now your local CPA can probably run with it, but we just got to get them to the place where they get familiar with all the entries and what reports to run in the DMS and which line from the DMS is what, you know, relevant numbers. So that's part of what we try to fulfill. And I just think it's important to kind of recognize those pieces because there is some Not everybody out there in the accounting world is familiar with finance company accounting. And there's finance company accounting, and then there's this related finance company where we really need, if I'm the dealer, I want to make sure my financials tie together. If I transfer a hundred thousand dollars in contracts from my dealership to my finance company, I want to see those entries tie together. I want to make sure that, you know, is joined at the hip on both sides. And so this is part of why I think, you know, good systems definitely help in that regard. So benefits. Benefits besides this, obviously income tax benefit that we see the, the centralization of the risk is one thing centralizing from a standpoint of the capitalization and the funding. Like I said, investment, it becomes much easier for me to go get investment around my finance company. That's where the income now is from the, we have two types of income basically in the RFC without getting too detailed, but it's like now I can capitalize that one company. That company can then source the contracts from the, and if I, it doesn't matter how many dealerships I have, I can out of one finance company, I can source contracts from multiple sales locations. And so now it's, it's much simpler to raise money inside that entity and to kind of keep everybody on the same page. I would say reach out to me if you're contemplating doing that because we run into problems. There are inherent problems with having investors come in only on the finance company side and not be involved in the dealership side for reasons people can't anticipate. We've encountered that a lot. So there are things to consider in setting that up and how to bring in those investors and how to have them participate and so on. So just be aware that there's some elements to look at in that regard. So the next thing is, like, what's required? And Karen piped in again. She's like, it's very possible that it's not cost effective to set up in the beginning for dealers with typical first year growth. And these are some of the reasons. Tax returns for both. So it's like you're having to file more tax returns, licenses, and separate entrance or locations. So when we're consulting and bringing a dealer in, this is a conversation that we have right out of the gate when they're looking for a location. yeah um and and so you know because they're like oh this is cool this is like does it have a second entrance right and they're like well why and it's like because when you set up an rfc you legally are required to have a separate entrance by the irs yeah they call it an arm's length relationship is kind of the broad way to explain that and I I challenge my dealers to set up and we're working with one now on the east coast and I always challenge them to Set the thing up in a way, treat it like it were across town or even in the next county. Well, and some people will do a separate building and have it in a separate location. Yeah. But if you're going to have it in the same location, it needs to have a separate entrance. Yeah. and a separate address and a separate address so like a and b there's a lot of stuff around this kind of arm's length part that we can come back and go to another level sometime but it's like for this I think we we we don't have to get that detail just know that there are in that arm's length relationship when you go set up this and I touched on it the irs has to have a set of rules because they don't want you to just claim that you're a finance company and you put money out of one pocket in the other I say and take your right off and go on like that's That there, there's a reason that an I, that a dealership is taxed the way it is. And so for you to sidestep that, that income, they're going to have to have a set of rules and you're going to need to play by that set of rules if you want to survive. Well, and the ability to be able to do this is something the IRS created and this is their, all right. So if you're going to do this, here are the things you got to do. And listen, I don't, I don't want to sound like we're scaring people because there are tons of dealers out there doing it very successfully. And it's a, it's a beautiful structure and it can make a lot of sense. We just don't want people, you know, kind of halfway and get themselves in trouble. And so this is part that we, you know, get professional help. And if it's not us, we can put you in touch with others who can fulfill the stuff on the accounting side and what have you. But, As far as what's required, the very first thing that I ask a dealer to do every time is find out what your licensing is in your state. Because when you go set up this separate company, which by the way, the separate company from the professionals that I work with tell me that that separate company needs to be an S elected company means that it needs to be a S corp. If you're doing corporation, it would need to be an S corp rather than a C corp. If you're doing an LLC, you need to make sure you check the S election. You've got to be an S type entity. Okay. I'm not, but you just know that it's a pass through. It's apparently passed through. And that's why the IRS would have put it that way is because that, that lets you, um, that means the parties involved still experience the income as it's experienced, right. As it's realized. But, uh, but I would say that, just know that we have to do that. But the other thing that's required is when we think about the financing license in some States, Texas being one of them, I've been told there've been times that a finance license in the state of Texas can take many months. Now that varies based on how busy they are and what have you, but, you know, government entities at times. It just depends. In some states, it's a simple notification filing. It's a one pager and a fifty dollar fee or something. And every state is very different. Very different. So some of this stuff becomes state specific and we don't try to get involved in the state specific. But we say, go find out in your state if you're going to set up a related finance company. What is required of me as a finance company? I've heard that some states require almost like a banking license, like the same kind of license that a bank or credit union would have to go get. Is that just for even setting up a buy here, pay here, or is that just specifically for an RFC? It varies by state. Various by state. But I did learn that one of the states that I, and we don't need to get too state specific here because that's just not really where we need to be, especially on a broadcast like this. But I did learn that one of the states that I always understood was that it was really not as stringent as I had been told. So that's why you just got to go find out, right? And that's where your state organizations can help you with that because they usually have a legal team, all of that, and they can give you that information. A plug for joining your state association. And if you don't know who your state association person is, then go to NIADA and they will direct you where to go because they're, they're, NIADA is the parent of all state associations. So... Yeah. And there are a lot of resources in certain states. There's more resources, but yeah, find out, get to with your state association, write that check first, make sure you're a member of that association. They'll have some resources. You'll have a lot more resources than you do if you don't. Yeah. And some of those, you know, some of those states have legal resources. And so just, just get that, write that check first. Yep. and find out what's required to get a license for a finance company so that you're legitimate as an entity in that way in your state first. And so, you know, even when we're consulting, that is something that we ask our dealers. It's like, go to your state, get your list, and we'll help you get through all the rest of the stuff. But just go to your state, find out what it is that they need outside of IRS requirements, and then we can help you through the rest of that. Sure. yeah so you know it just becomes a question now of you know so when does this make sense and we just hear from a lot of dealers and I'll I'll sometimes ask them you know and I'm surprised at the size of some of the operations that we work with that don't have one we're working with one right now that has a portfolio of over five million so if you do a thirty percent discount on five million dollars of notes by the end of the year that dealers look is able to write down their income In twenty twenty four by more than one point five million dollars at a thirty percent discount because the discount is on the notes. We didn't say that, but it's on the it's on the note itself. So it would be whatever the note balance is principle at the time the contract gets transferred after down payment and all of that. Yeah. But you're also adding in your recon costs and, you know, that's that's part of the cost side. Yeah. Yeah. So, so the note is the note, whatever we've originated in and agreed with the customer and customer signed the note. And then if they've made some payments and the note would be less. And so like in this dealer's case, you're going to have some new contracts, a whole lot of seasoned contracts, but you can certainly discount and sudden over a seasoned contract. So when would you suggest, I mean, you know, we talk about in a year, but sometimes dealers might only be selling five cars a month. And so what would you say is the threshold to say it's now is a good time for you to do this? Yeah. Again, I just think the administrative costs, you have to look at how many contracts you have and what that discount, if you just use a thirty percent factor and you say, take the number of dollars you have in your portfolio principle, multiply that times point three, that's going to be your adjustment to your income. Now compare that to the administrative cost. So I would say that's a smaller number than most would say. I can see a dealer justifying that if they're on the right software and it's simple enough, I can see them justifying that. Why? Because it could be next year where we can have a conversation around capitalizing your entity and I'm going to want to see you capitalize the RFC. So we've already got it. We took advantage of tax discount last year and now we've got the thing to capitalize. And if I get bringing a lender in the picture, the lender is going to want to be attached to the RFC, you know, so just there's, It's an administrative question. It's a cost of the administration to get it set up. And as Karen alluded to, there are things that you have to satisfy in this arm's length relationship to make sure it's a legitimate sister separate company. Okay. And so it can be related, but it needs to be separate. That's why they call related finance company. Yeah. And so it's going to have a special set of rules. And that's why I say there's so few people in the country that are familiar with this. It's really our buy here, pay here space. I mean, there may be other furniture businesses or whatever else that do it. But in automotive, we have big ticket, We have a lot of phantom profit. And so this is why it's more common in the buyer payer space. But I said, you know, there's just aren't that many people that are familiar with the whole element. So it's just important to get it done right. It's just not worth saving a few bucks to kind of, you know, skirt around it and go set it up yourself and risk doing it wrong because the price of that can be huge. Yeah. Well, and like Karen said, Amanda Sanchez has some videos that they're, they're free to anyone about setting up an RFC. We also find that, you know, it's as, as we're developing our curriculum and our content and everything that there's a lot of different ways, you know, you can, you can do it for them. You can do it with their help or you can have it be self-service. So that video in with Amanda and, you know, the content that we put out with the Buy Here, Pay Here Morning Show is do-it-yourself. Most people don't have the bandwidth to be able to do that. So if, if doing an RFC is something that you're either looking forward to do this year or next year, this year, it's, we're getting kind of close to the, the ending, but there's still time. delay will be licensing the major delay time for somebody to get yeah get one set up before the close if that's their fiscal year yeah and most people are a fiscal on a calendar year right but but if um yeah you're right there's time to do it just got to first check on licensing and if you find out the licensing if you've got time to do the license you want to do it reach out Yeah, absolutely. So if you need help, call or text, call or text, and, you know, even if it's, if it's not Jim, there's a lot of other people out there too. And, and, you know, if you want to, yeah, it's like, yeah, absolutely. But it's, but it's important enough doing an RFC that it's a good idea to have someone that understands it, that's sitting in your corner with you to help you walk you through it. Because it is, I mean, you know, who wants to mess with the IRS by setting something up wrong and then they're coming back and. Yeah. And the last thing I would say on this is it kind of relates to as a white hat element is one of the things that I see in the software separation is if, if I'm, if I'm a dealership and I'm training my cashier or my collectors to take payments, I don't want to be in a position. I don't want my collectors and cashiers to be in a position is, okay, Mrs. Jones is on the phone wanting to make a payment. I have to figure out if Mrs. Jones' contract is in the sales company because even after an RFC, the contracts will live in the sales company until they're ready to be transferred over. So I would have to know, is Mrs. Jones' contract in the sales company? Do I have to log into that contract? or has it been batched into the other? Yeah, but I would have to know. I would have to know which company, because a lot of the systems make us go log into one company to process, and then I'd have to log out and log into another company if Mrs. Jones is actually over here. Do all systems do that? No, I'm saying this is where we start to separate. This is where we start to separate, yeah. This is one of the key things. It sounds like a small thing, but... Some of the better systems, I just look up Mrs. Jones. I go in and post the payment and the system handles the rest. The system knows whose account is where the system, where the contract belongs. And so this is where you start to really separate. It's like this is among the things. And then the actual accounting function that happened with all this. Because there are, and I would also, you think about having two separate accounts. DMS systems, that whole thing about the transfer of contracts and some of the stuff that happens there, I just want it all tied together. And if it's in two different systems, I increase the chance of mistakes pretty substantially, right? Because there's just a human error. I'm doing this process over here and I've come over here and do the process in the other system. But you're also, you know, even if it's in the same DMS, but it's a different account, account is they don't connect. And so it has to be manual, manual, manual both ways. And human error. Yeah. I mean, I know that computers and systems make mistakes, but not It's usually if those mistakes are made, it's because there was a human error in how it was set up or something, typically. Typically. So there's so much meat on the bone with this one. And a lot of it does start with, here's your DMS. Right. And are they able to support you having an RFC? And what does that support look like? Right. Because a lot of DMSs will say, Yeah, we can support that. But they don't have it where it's your one login, and everything's kind of just taken care of, like you said, where the system knows, and you don't have to go and, and dealers hate having to be logged into seventeen thousand different things. And collectors do too. And I think, I don't want to get, and we can wrap up on this one thing. It's a little bit more detailed, but I would say when people say, why, why a thirty percent discount, right? Like I, that's what I, when I'm working with a dealer that's new and we're loading cash flow modeling and I, there's a place where I can talk about, I usually show them a thirty percent discount. It's pretty common. Have I seen more? Have I seen less? Absolutely. So it's something that you would adjust over time because it's really meant to be related to your portfolio performance. What is the real value of these contracts that I'm selling to this other company? What, what, how much discount should they be acquiring? Right? So there's a, there's, there's work to be done there, but most, most that happens as the company matures. But when you start at a thirty percent discount, it gives you, that's, that's common. And why does that happen? Because the finance company is going to earn the, The interest, when they acquire those contracts, all the interest associated with those contracts is going to belong to the finance company. But that's not enough profit for them. They need to earn some discount, some other opportunity for taking on the risk of the contracts. And so that's why they buy it at a discount. Which is why when you sell your notes, they buy them at a discount too. Because there's a risk there associated with it. And they need the income for both. And it's just, yeah, it's a whole other can of worms. Yeah. Let's not do it. Make a note and we'll bring it back. Yeah. Well, yeah, it's where I'm just going to give you a teaser. Repo rates or charged off accounts percentages, which is a big hot topic. And what are, why dealers are... complaining when a capital provider only wants to give them seventy percent or sixty percent or six a bulk buyer a bulk buyer or yeah yeah um and it's like yeah that's yeah that that's why okay they all have their own algorithm too what they look at but yeah we can save that for another day yeah absolutely Hey, everybody. Thank you so much for joining us today. Again, if there is anything that we can help you with on getting your RFC set up, we do do a free discovery call. But go ahead and call or text. Or if you go to WhiteHatWay.com, you can actually schedule a discovery call too. Jim at White Hat Way too. They can email me there. Jim at White Hat Way. Absolutely. All right, everybody. Well, thanks so much for joining us today. We really, really appreciate you supporting what it is that we're doing with education. And so spread the word. And if we have a lot of things that are done on spreadsheets and visuals and stuff, Make sure you go to YouTube and like and subscribe because you'll be able to see all of the things that we're talking about. I know that there's a lot of listeners out there that are in just audio listening land. So there's lots of good quality content that you just need to be able to see. Everybody have a great weekend and we will see you on Wednesday.
