Buying any business takes one thing: money. Financing a FedEx Ground Route is no exception. But how does it work in 2022? There are a few key financing options when it comes to buying a route, from a small business loan to other borrowing methods.
While interest rates are rising, they are still relatively low. Here are some tips on financing a FedEx Ground route in 2022.
Cash is King
Like in many other areas, cash is king. If you have the cash to purchase a route outright, that is the best way to do it. Even if you don’t have all the cash you need on hand, using as much cash as possible will reduce the overall costs to your business.
One word of caution: even if you have all the cash you need to purchase a route, you may want to finance part of it. Why? Simply because you need to keep some cash reserves in store in case of emergency. Don’t dip into the cash you have set aside for an emergency or operations fund to purchase the route: you might end up in greater debt in the long run.
Generally speaking, using credit cards to pay for repairs or operating costs, especially if you are unable to pay them off right away, can result in higher interest rates and harm your profits. Be careful about using cash to make a purchase, but if you can and not impact your overall cash flow, do it.
A Small Business Loan
When it comes to FedEx routes, this can be a little tricky. Some banks don’t understand route ownership, and the type of business you are purchasing. Talk with your business broker, your local SBA, and find a bank that specializes in financing your type of business.
Remember, to qualify, it will depend on your personal credit score as well as your business credit history (if you have one) and you can expect to have to put a significant amount of money down, usually around 20-30%. There are some cases where this can be lowered, so talk to your bank or your business broker. Check out the SBA loan site here for more information.
A long-term SBA loan is the best way to purchase. Your payments will be lower in the short term, and you can always double up and pay off your business early. Shorter-term loans can seem attractive at first, but if you have any emergencies or last-minute repairs to make to your vehicles, or any unexpected operations costs, those higher payments can become a burden quickly.
If you can’t, or don’t want to get a small business loan, there are other options.
Leverage your Personal Assets
These methods of financing are listed in the order of desirability. Cash is king, small business loans are second, but you can finance your business by leveraging your personal assets by doing things like using home equity.
This is a common tactic for route owners starting out. It helps them build business credit, and gives them ready cash to draw from (in the case of a Home Equity Line of Credit, or HELOC). But there are some drawbacks.
First, make sure your family, especially your spouse, is okay with this risk. If something were to go wrong, your personal assets are on the line. Second, make sure you have income external to your route to cover at least part of your loan expenses, at least for the short term. It may take a month or even a few months before you really start to see a profit from your route. Be prepared with the reserves you need to hold out until then.
Finally, don’t over-leverage your personal assets. Only use the funds you absolutely need for purchasing your business.
Friends and Family
The final, and least desirable, source of funding is to borrow from your friends and family. Here again, there are some drawbacks and some things you should do.
- Draw up a contract, just like you would with any other loan.
- Stick to your contract, and make payments on time. You don’t want to ruin a relationship over money.
- Be open and honest about what you are doing, and how you use the money you have borrowed.
- Always put relationship above money.
Make sure that if you borrow from friends and family they are comfortable with what you are doing and that they understand the business you are getting into. Keep them in the loop with how things are going, and above all be honest if you struggle.
You don’t want to ruin a relationship over money, so be confident in your ability to pay back what you have borrowed before you take that step.
Financing any business can be tricky. Be sure your loans are something you can handle and repay. And if you have cash, use it. However you finance a FedEx Ground route, make sure you are protected, and that everything you do creates an advantage that sets you up for success.
Questions about route financing? Contact us at Route Advisors today. We’re here to walk you through the process every step of the way.