Thinking about buying a FedEx route for sale? It could be a good option if you want to enjoy both the perks of business ownership and the benefits of working under the established reputation of FedEx. Your purchase may also qualify for financing from the Small Business Association’s (SBA) loan programs.
This article explains the SBA loan programs’ benefits and how they can help prospective FedEx route owners secure the needed capital to set their business on the road to success.
How Does FedEx Route Ownership Work?
Buying a FedEx route does not mean that you’ve bought a piece of the FedEx company. You’re not purchasing any physical land or assets, either. All FedEx routes are bought and sold as contracts. When you purchase a route, you purchase guaranteed business sent your way from FedEx. You’re basically buying the assurance that business from FedEx will pass through a particular set of streets, which you’ll get paid to operate.
Route owners operate as independent contractors. From a tax perspective, that means you own your business. It also means that you’re responsible for the equipment, employees, and management of the route.
FedEx may have their name on the sides of the trucks, but you become the boss when it comes to making sure the business on your route is running smoothly.
Why Are SBA Loan Programs Good for Buying FedEx Routes?
The collateral requirements of conventional loans (i.e., traditional bank financing) could be a problem for entrepreneurs buying FedEx routes since the business model is light on assets compared to other businesses.
Lenders may require a borrower to pledge assets worth up to 150% or more of the loan amount to qualify for a loan. Business owners will need to pledge assets owned by the business to meet this collateral requirement. They may also have to pledge personal real estate, like their homes and rental properties, to secure a loan.
If you’ve ever browsed FedEx route sales, you know that they are expensive, making the collateral requirement for a conventional loan a large hurdle for many entrepreneurs. A single ground route can range anywhere from a couple hundred thousand dollars to millions of dollars.
Unlike traditional loans, SBA lenders aren’t required to ask for an amount of collateral that exceeds the value of your loan. For loans over $350,000 the lender can list the following to meet your collateral requirements:
- Business Assets
- Commercial Properties
- Value of Your Business Accounts Payable and Receivable
If the value of all your business assets doesn’t match the value of the loan you’re taking out, the lender may also have to list your personal property. However, putting up a personal residence for collateral is generally a last resort for SBA Loans.
In addition to having generally lower requirements for collateral, SBA Loan programs also come with other benefits, including:
- Extended Maturities. This means you have a longer time to pay back the loan, so monthly payments may be smaller.
- Flexible Use of Funds. The SBA has a broad range of eligible uses for the loan program, so small business owners have an easier time using the funds on what they need most.
- Maximum Interest Rates Set by the SBA. The rates are set so that small business owners can compete in the current economy.
How Can FedEx Route Owners Use SBA Loans?
Buying a FedEx route can be financed using SBA loan programs because the purchase falls under the eligible uses of proceeds set by the SBA. In addition, you could also use the funds to…
- Purchase trucks, vehicles, and other transportation equipment
- Pay and train employees
- Purchase and pay for insurance on equipment, packages, and employees
- Purchase package processing software and tools
- Pay royalty fees
Why Are FedEx Route Buyers Eligible for Small Business Loans?
The SBA’s loan programs were made to benefit small business owners. FedEx is a large company. Why would they let people use the loans to buy FedEx routes?
Since route owners are independent contractors, they qualify as small business owners. Owning a FedEx route means that FedEx is a contractually bound customer who must use you as a vendor for the streets on your route. It doesn’t mean they employ you in the traditional sense.
Whether you use employees to man the routes or fulfill every order yourself, the fulfillment business is owned by you.
The SBA just requires your business meets the following eligibility standards to qualify for their program. The business must:
- Operate for profit
- Be engaged in, or propose to do business in, the U.S. or its territories
- Have reasonable owner equity to invest
The SBA also reviewed the following arrangements with FedEx and deemed them eligible for financing based on their standards for small businesses. You still have to meet universal standards, but if you operate under any of the following agreements you are not excluded from SBA Loan programs because of your working relationship with FedEx:
- FedEx – Home Delivery Operating Agreement
- FedEx – ISP Agreement
- FedEx – Linehaul Agreement
- FedEx – Pick-Up and Delivery Operating Agreement
- FedEx Ground
- FedEx Ground Package System, Inc. – Independent Service Provider Agreement
Which SBA Loan program is Best for Future FedEx Route Owners?
The most popular SBA Loan program is the 7(a) program. It offers flexibility for how you can use the funds, so it’s been a good fit for many different types of projects. Through the SBA 7(a) program eligible businesses can receive loans up to $5 million to benefit their business.
The SBA 7(a) Loan is likely the program most FedEx route purchasers will use, but it’s not the only way to secure financing for this small business. Speak to a professional from a trusted institution to help determine the best options for your unique business and goals.
How Do I Apply for an SBA Loan to Buy a FedEx Route?
Ready to begin the formal SBA loan application process to fund buying a FedEx Route? Follow these next steps.
1.Confirm Your Eligibility for SBA Financing
First, confirm you meet the universal requirements for eligibility set by the SBA. Next, research the requirements of lenders you want to consider working with. Lenders may have their own standards to meet to process an SBA loan through their institution. Be prepared to address exactly how you’ll use funds from the SBA program when you meet with lenders to talk about your options.
2. Prepare Your Application Documents
Your loan application will need to detail your financial history and business plan to properly process your loan. The lender will look at factors like your credit history, assets for collateral, business plan, and financial statements to determine whether or not you’re a candidate for an SBA Loan program.
You’ll need to submit documents such as your:
- Business plan
- Business and personal tax returns (past three years)
- Business debt schedule
- Business interim financial statements
- Personal financial statement for all guarantors
- Executive summary for owners and managers of the business
- Detailed explanation for the use of the loan funds
Collect and organize these documents prior to beginning the formal application. It may help your loan application move along more quickly.
3. Start the Application with a Trusted Lender
Your SBA Loan must be processed with a legitimate lender. The lender will walk you through the application process from start to finish. They’ll also help you gather any additional documents you may need for your specific business and ensure that each piece of the application is submitted at the correct time.
Learn more about our applying to SBA Loans with our tips for preparing your SBA Loan Application. Have questions about any point of the process? Our SBA loan officers are always happy to help.
Addressing the Need for Out of the Box Small Business Financing with SBA Loans
West Town Bank & Trust is proud to serve small business owners and entrepreneurs, helping them access affordable capital when they need it most. Use the contact form below to speak to an expert who can guide you through the SBA Loan application process.