How to Finance FedEx Routes
Jump To: Small Business Association (SBA) Loans, Conventional Bank Loans, The Impact of Amortization, Creative Financing, Collateral
When we discuss purchasing FedEx Ground routes, many investors have questions about the availability of financing and what your options are.
In any given year, roughly 25% of all transactions are done with cash, while the remaining 75% involve some form of bank financing. Potential buyers often turn to bank financing to purchase FedEx Ground routes as it gives the buyer more purchasing power and options to acquire a business.
Even if you have the available cash, it’s also not a good business practice to put every bit of cash you have into a transaction. You always want to save room for working capital to cover any operational or unexpected expenses that arise after you take over the business.
If you are considering financing a FedEx Ground operation, the two most common types of loans are a Small Business Association loan and a conventional loan. However, you can also use a creative financing approach, which can significantly expedite the selling process.
Small Business Association (SBA) Loans
The US Small Business Association (SBA) is a government agency that spurs entrepreneurship and economic growth. They are most well known for their government-backed loans for business start-ups and acquisitions.
SBA Banking Terms
Many lenders require a 20% down payment
Some SBA lenders will accept 10% with a minimum 5% contribution from the buyer
10-year amortization schedule
More expensive loan fees
Lower monthly payments on the loan
Heavily dependent on the financial health of the business
Pros
SBA loans often offer longer terms with lower monthly payments.
Some SBA lenders have deep experience with FedEx Ground operations (thus making it easier and quicker to secure a loan).
SBA loans often require a lower down payment (ranging from 10%-20% of the purchase cost).
Loans via the SBA are easier to secure for applicants with fewer liquid assets.
These loans are easier to secure for individuals with a limited or mixed credit history.
Cons
These loans are often incredibly expensive due to the origination fee, which is how much the bank charges to process this loan. In our experience, the SBA charges 5% of the borrowed amount (and rolls that fee into the loan) whereas most conventional loans charge 0.5-1% of the amount borrowed.
Interest rates for SBA loans are often 2%-4% higher than conventional financing rates.
The SBA aggressively pursues personal collateral which may include your home, car, or any other valuables.
The SBA loan approval process can be slower than other types of financing (up to about 60 days versus 30 days for conventional financing sources).
If a buyer does not have at least a 10% cash down payment, the buyer cannot pay back any seller financing that is credited towards the down payment (if applicable) until after the SBA loan is repaid.
Conventional Bank Loans
Conventional banking loans are loans you receive from a local or national bank.
A conventional bank is any bank where you have a checking account, a car loan, or a mortgage. These smaller banks offer conventional business loans with different terms and conditions compared to the SBA.
Conventional Banking Terms
Conventional loans require more than a 20% down payment.
Conventional loans often have a 5 or 7 year amortization schedule.
Loan fees are often lower for conventional loans.
Conventional loans typically have higher monthly payments compared to SBA loans.
Conventional loans are heavily dependent on the financial health of the buyer.
Pros
Conventional financing terms typically have lower interest rates compared to the SBA.
Conventional loans take less time and are easier to secure for qualified applicants.
These loans typically have lower fees and rates.
Applicants may use personal relationships (such as your existing mortgage or car loan officer) to secure a business loan.
Cons
Conventional loans usually have shorter payment terms but higher monthly payments.
Securing these loans often requires down payments of at least 20%-25% of the total purchase cost.
Conventional banks and credit unions have higher standards for business loans and require borrowers to have better credit and more liquid assets.
The Impact of Amortization
The biggest material difference between SBA and conventional banking options is the effect the amortization schedule has on your cash flow. Below is an example of how different schedules can greatly affect your monthly cash flow:
Let’s say you buy a business for $500,000 with $125,000 down (25%). So, you are financing $375,000 for your route purchase.
Loan @ 7% interest over 5 years, monthly payments: $7,425 ($70,527 in interest*)
Loan @ 7% interest over 7 years, monthly payments: $5,660 ($100,419 in interest*)
Loan @ 7% interest over 10 years, monthly payments: $4,354 ($147,488 in interest*)
*over the life of the loan
Notice that in our example of a 10-year SBA loan, the monthly payment is significantly less but you will pay double the amount in interest over the life of the loan compared to a 5-year amortization.
It’s important for you to decide what financing option is best for you and your financial situation. Route Consultant works with each of our buyers to prepare for financing and help you through each step of the process.
Consider Creative Financing
If you’re having trouble securing a bank loan, feeling a bit stretched for cash, or simply want to avoid dealing with a bank altogether, we highly recommend looking at creative financing options.
There are many benefits to including some type of creative financing in the deal for both parties.
Alternative financing options usually include a combination of three things: cash, seller financing, and assumption of existing debt.
Seller Financing
Seller financing means that the seller personally loans you part of the purchase cost, and you will pay back the seller this portion of the price (usually with interest).
The biggest banking benefit of seller financing is that SBA and conventional lenders will credit seller financing as part of the down payment on the loan!
Let’s give an example: Let’s say you have $100,000 cash on hand and you want to purchase a business. If you used all of your cash as a down payment on a loan, the most you will likely be approved for is $500,000 with a minimum 20% down requirement from the SBA.
However, if you include 10% seller financing in the deal, the bank will recognize that 10% as part of your down payment. Now, instead of getting a $500,000 loan with $100,000 down, you can get a $1,000,000 loan with $100,000 in cash and $100,000 in seller financing.
The great benefit of seller financing for buyers is that it can increase a buyer’s purchasing power and help close a deal with fewer upfront financial burdens.
For sellers, seller financing can also add value because it can increase the pool of buyers that can afford your business. This also allows you to ask for a higher overall purchase price without any additional cash commitments from the buyer.
Pros
Seller financing can help cash-strapped buyers afford higher-cost routes.
Seller financing can help buyers who have plentiful cash on hand but struggle to secure additional funding via the SBA or a bank.
Seller financing increases the potential buyer pool for sellers.
Seller financing allows sellers to ask for a higher purchase price to offset the. risk
Cons
The seller accepts some risk of a buyer defaulting on the loan.
Multiple SBA rules “subordinate” any seller financing to the SBA. This means in the event of a default, buyers cannot pay back a seller until the SBA loan is paid in full.
Seller financing can be a powerful and helpful tool for both parties when closing a deal. We recommend that every deal include at least 10% in seller financing. This provides an opportunity for the seller to get the most value for their business and gives the buyer more purchasing power and financial breathing room. By including seller financing in the deal, it ensures that both parties have a vested interest in the success of the operation.
Assumable Debt
When we talk about assumable debt, there are usually two primary focuses: existing loans and vehicle debt.
An important question to ask during the due diligence process is whether or not the seller has an existing loan on the business or existing debt on the fleet. The next question to ask is whether that existing debt is assumable.
Some SBA loans and vehicle loans can be assumed by (or transferred to) a buyer. Instead of the seller paying off that debt, the buyer can assume the debt and submit a lower offer as a result.
Let’s give an example: Say you have a business for sale with a purchase price of $1,000,000 and $200,000 of existing vehicle debt. In a normal deal, the buyer would pay $1,000,000 for the business and the seller would pay off the $200,000 in vehicle debt. The seller can then transfer the vehicle titles to the new owner, and the seller profits $800,000 from the deal.
As an alternative, the buyer could offer to assume the $200,000 of vehicle debt and offer $800,000 for the business instead. This effectively lowers the purchase price and cash commitment for the buyer without changing the net profit that the seller receives from the deal.
Assumable debt is just another way that either party can sweeten a deal. Both buyers and sellers should consider creative financing options when constructing an offer or counter-offer. Seller financing and assumable debt can be huge value adds to get a deal across the finish line sooner.
What Is Collateral?
If you choose to finance the purchase of FedEx Ground routes, your lending institution will have you sign a personal guarantee. A personal guarantee involves a set of assets you are promising to surrender or liquidate to the bank if you are unable to make loan payments and you default. The assets pledged in a personal guarantee are often referred to as collateral.
Both conventional financing institutions and the SBA use personal guarantees in their loan process. The SBA, particularly, is extremely rigorous about seizing or liquidating your assets when you default on a loan. The SBA will tie up your house and any other personal assets to ensure they get most or all of their loan back.
Conventional banks or credit unions may also strictly enforce collateral. However, conventional banks may be more lenient at times if they believe pushing hard on the personal guarantee will paint them in a poor light within their community.
The bottom line is this that lending institutions are incredibly serious about your personal guarantees and you need to think carefully about them before proceeding.
Collateral for Seller Financing
Any seller financing loans must be subordinated to a bank if an SBA or conventional loan is involved in the deal. This means that the banks must be paid off before a seller can be paid.
As such, buyers will often need to provide collateral for any seller financing on top of the collateral already promised for a bank loan. It’s very common for sellers to require a personal guarantee for seller financing. If you are negotiating a deal through Route Consultant, we work closely with our buyers and sellers to craft a reliable and fair personal guarantee that both parties can agree to.
Offering seller financing without a personal guarantee is extremely risky and is not recommended.
Missing Payments
If you believe you are going to miss payments on your loan, you should reach out to your lender in advance. Ask your lender to help you restructure your monthly payments so that you are in a place where making the payments is feasible.
You have far more bargaining power in a restructuring conversation if you begin the conversation before default proceedings begin.
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