(RFC) Structure for BHPH Dealers
For many Buy Here Pay Here (BHPH) dealerships, long term stability and growth depend on a sound operational and financial structure. One of the most effective models is the creation of a Related Finance Company, or RFC. This strategy involves establishing a legally separate entity dedicated solely to purchasing, holding, and servicing the auto loans originated by the dealership. While the dealership focuses on acquiring quality inventory and selling vehicles, the RFC manages the entire lifecycle of the financing agreement. This separation creates a more streamlined organization, mitigates certain types of business risk, and can significantly improve the dealership’s ability to secure capital for expansion. Understanding how this dual entity structure functions is a critical step for any BHPH operator looking to scale their business, maintain compliance, and build a more resilient and valuable enterprise for the future.
Adopting a Related Finance Company structure is a strategic move that positions a BHPH dealership for sustainable success. By separating the sales operations from the complexities of loan servicing and portfolio management, dealers can achieve greater focus and efficiency. This model not only strengthens the company’s financial footing by making the loan portfolio more attractive to outside capital partners but also creates a dedicated hub for managing compliance and collections. Ultimately, an RFC provides the foundation needed to grow inventory, manage risk, and serve customers more effectively.
The Strategic Advantages of a Related Finance Company in the BHPH Industry
In the world of Buy Here Pay Here, the dealership is both a retailer and a lender. This dual role presents unique opportunities and challenges. While in house financing allows dealers to serve a broader customer base, it also means managing the complexities of underwriting, collections, and regulatory compliance. A Related Finance Company (RFC) is a sophisticated business structure designed to address these challenges head on. It creates a formal separation between the car-selling business and the loan-financing business, even though both are typically under common ownership.
At its core, the dealership (often called the "SalesCo") continues to do what it does best: source, recondition, and sell vehicles from its used inventory. When a sale is made, the SalesCo originates the retail installment contract. Instead of holding this loan on its own books, it sells the contract—the "paper"—to the RFC (or "FinCo"). The RFC then becomes the legal owner of the loan, responsible for servicing it, collecting payments, and managing the account until it is paid in full. This simple transaction unlocks powerful strategic benefits that can fundamentally change a dealership's trajectory.
Why BHPH Dealers Embrace the RFC Model
Implementing an RFC structure is more than just an accounting maneuver; it is a strategic decision that impacts nearly every aspect of the BHPH operation. Dealers who adopt this model often experience improvements in risk management, access to capital, and overall efficiency.
- Risk Mitigation and Asset Protection: By creating two separate legal entities, you build a firewall between your primary operations. If the sales company faces a lawsuit or liability claim, the loan portfolio held by the RFC may be insulated from that legal action. Conversely, if the finance company encounters a compliance issue, the dealership's physical assets, such as its real estate and inventory, are better protected. This separation is a cornerstone of prudent risk management in a highly regulated industry. For more information on navigating regulations, see our article on state licensing requirements for BHPH dealers explained.
- Improved Access to Capital: One of the most significant advantages of an RFC is its ability to attract outside funding. A finance company with a clean balance sheet, a portfolio of performing loans, and meticulous records is far more appealing to banks and capital providers than a traditional dealership with comingled assets. Lenders can more easily assess the value and risk of the receivables. This clarity makes it easier to secure floor plan financing or revolving lines of credit, which provides the cash flow necessary to purchase more inventory and grow the business.
- Enhanced Operational Focus: The RFC model allows for specialization. The dealership team can concentrate on sales and customer service, while the RFC team becomes experts in finance, underwriting, and collections. This focus leads to better performance in both areas. Your sales staff isn't distracted by collections calls, and your finance team isn't pulled into lot operations. This division of labor leads to more efficient processes, from building a collections process that keeps customers paying to perfecting the sales experience.
- Simplified Accounting and Performance Tracking: While it may seem more complex initially, two separate entities can actually make it easier to measure the profitability of each part of your business. You can clearly see how much profit the dealership makes on vehicle sales versus how much the finance company earns from interest over the life of the loans. This level of detail is invaluable for making strategic decisions about inventory pricing, underwriting criteria, and collections strategies. Working with a specialized accountant is key, as covered in our guide to working with an accountant who understands subprime auto.
Setting Up and Operating with an RFC
Establishing an RFC requires careful planning and professional guidance. The process typically begins by forming a new legal entity, such as an LLC or S-Corporation, that is distinct from the dealership entity. This new company will need its own bank accounts, tax ID number, and, crucially, the proper state and local licenses to operate as a sales finance company. The regulatory requirements are often different for a finance company than for a dealership, so thorough research and legal counsel are essential.
Once established, the two companies operate through a formal, arm's-length relationship. When the dealership sells a vehicle, it originates the loan paperwork as usual. Then, through an established agreement, the RFC purchases that loan from the dealership. The purchase price is typically the principal amount of the loan, allowing the dealership to immediately recoup the cost of the vehicle and its associated expenses. This provides the dealership with the liquidity it needs to acquire the next car for its lot. The RFC, in turn, now owns the income stream from the customer's future payments, including all the interest, which is where the finance company's profit is generated.
This structure requires meticulous record keeping. Every transaction between the SalesCo and the FinCo must be documented. The RFC must manage its portfolio diligently, tracking payments, handling delinquencies, and ensuring every action complies with consumer finance laws. While this adds an administrative layer, the benefits of clarity, protection, and access to capital often far outweigh the additional workload for growing BHPH operations.
What is a Related Finance Company (RFC)?
A Related Finance Company, or RFC, is a legal entity separate from a Buy Here Pay Here dealership but typically under the same ownership. Its sole purpose is to purchase, own, and service the auto loans that are originated by the dealership during a vehicle sale.
Why do BHPH dealers create a separate finance company?
Dealers create a separate finance company primarily for risk mitigation, improved access to capital, and operational efficiency. Separating the assets of the sales lot from the loan portfolio provides a layer of legal protection and makes the loan portfolio a cleaner asset for securing bank lines of credit or other funding.
Is an RFC legally required for a BHPH dealership?
No, an RFC is not a legal requirement to operate a BHPH dealership. Many smaller or newer dealerships hold their loans within the same company that sells the cars. However, as a dealership grows, the RFC structure becomes a highly advantageous model for managing a larger portfolio and scaling the business.
How does an RFC help a dealership get more funding?
An RFC creates a distinct entity whose primary asset is a portfolio of cash flowing receivables. This clean structure makes it much easier for banks and capital providers to analyze the value and performance of the loans without the complexities of dealership assets like inventory and real estate. This clarity often leads to more favorable lending terms and higher advance rates.
What are the main differences in operations between the dealership and the RFC?
The dealership (SalesCo) focuses on operations related to the physical vehicles: sourcing at auction, reconditioning, marketing, and sales. The RFC (FinCo) focuses exclusively on the financial product: underwriting applications, managing loan documents, processing payments, performing collections, and ensuring compliance with all lending regulations.
