No Payments for 6 months? Now you have my attention.
Under the provisions of the new CARES Act, the Small Business Administration (SBA) will cover the first six months of payments – including principal, interest, and associated fees – on new SBA loans. The loan must be closed from February 1, 2021 to September 30, 2021, and payments are capped at $9,000.
What is an SBA loan, and how do I get one?
SBA loans are government-backed loans, intended to promote economic growth and entrepreneurship. All major business lenders (e.g. Wells Fargo, JPMorgan Chase, Bank of America, etc.) offer SBA loans. The loan forgiveness program covers SBA 7(a) and SBA 504 loans, which have a variety of purposes including business acquisition, equipment acquisition, working capital to help manage cash flow, and business expansion. It does not cover Paycheck Protection Program (PPP) loans.
Are there any additional benefits during this SBA loan period?
Beyond six months of payments forgiveness on new loans, the additional benefits are as follows:
- The SBA is increasing its loan guarantee to 90%.
- The SBA is waiving guarantee fees, which range from 2.6% to 3.5%.
- Refinanced loans – both SBA and non-SBA – will also receive six months of payments forgiveness under this program.
- Borrowers that obtained SBA loans during the 2020 forgiveness period may qualify for another 3 to 6 months of covered payments.
The positive outcome of these benefits combined is that banks will be more willing to make SBA loans, as they are largely guaranteed by the SBA. These conditions bode well for those seeking to buy or sell FedEx routes and are also favorable for those wishing to invest in the routes they own.
I want to buy FedEx routes. What else is important to consider?
It is an opportune time to purchase FedEx routes because:
- The temporary SBA loan forgiveness program will increase the ease of access to financing.
- Six months of no payments will significantly improve cash flows immediately following purchase.
- More high-quality routes will be available for purchase since current contractors perceive the favorable lending conditions for potential buyers.
Buyers will need to obtain an SBA 7(a) loan. These loans are available in amounts up to $5 million with flexible terms, allowing for longer maturities and less money down.
To qualify for this type of loan, borrowers must identify the FedEx routes to purchase. If the seller filed tax returns for the routes, the returns must be provided to process the loan.
It is possible to buy only a portion of the routes without purchasing an entire business. However, the seller will need to provide separate financial statements for the routes being sold as well as the routes not being sold. Without clear financial records, it is unlikely that an investor will be able to obtain an SBA loan.
It is worth noting that SBA loans are now a more attractive option for banks, as the SBA has guaranteed 90% of the loan amount.
What if I am a current contractor? Is it a good time to sell?
With the new SBA loan program in place until September 30, 2021, it is a very favorable time to consider selling your business.
Savvy investors would be wise to consider the most recent FedEx earnings report, released December 17, 2020. According to this report, FedEx Ground handled an average of 12.3 million packages per day in the three months prior to November 30, 2020, up from 9.6 million from the same period in 2019. During this time frame, revenue per package rose from $8.80 in 2019 to $9.42 in 2020, and operating margin increased from 6.4% to 7.5%.
These encouraging numbers increase investor interest in purchasing FedEx routes. With COVID-19 accelerating the trend toward ecommerce, route-based businesses have proven recession- and pandemic-proof.
Thus, there are three major forces at play that are driving FedEx route valuations higher:
- The new SBA loan program is providing attractive financing options for investors.
- FedEx Ground has seen higher profits due to the surge in demand for delivery services.
- Buyers are increasingly interested in purchasing a finite number of FedEx routes for sale.
Consequently, the current market conditions present excellent opportunities for FedEx route owners to sell at high transaction values.
I am a current contractor, and I do not wish to sell at this time. Can I still benefit from the SBA loan forgiveness program?
Current contractors can avail themselves of this program by obtaining an SBA loan during the specified forgiveness period for real estate or equipment acquisition (e.g. trucks), construction, working capital to manage cash flows, and refinancing debt.
Depending on the exact use, a current contractor may obtain either an SBA 7(a) loan or an SBA 504 loan. Only SBA 7(a) loans can be used as working capital, and the maximum amount is $5 million.
SBA 504 loans are more frequently used to refinance debt, and the maximum amount is $5 million from the SBA. However, depending on the specific project and the lender, these loans may have a maximum amount of $11.5 million or more. The additional loan funds come from Certified Development Companies (CDCs), which are nonprofit corporations that promote economic development in their communities through 504 loans.
Both types of loans require only a 10% borrower contribution, and both will have six months of forgiven payments if closed before October 1, 2021. The forgiven payments will not be counted as income by the IRS.
Wait…so, everybody wins with the SBA covering the first six months of payments on loans closed between February 1, 2021 and September 30, 2021?
Yes, there advantages for buyers and sellers of FedEx routes, and there are benefits for FedEx route owners as well.
The experts at Black Iron Advisers are uniquely qualified to assist you in the purchase, sale, or financing of your FedEx routes. Not only are they experienced FedEx Ground Independent Service Provider (ISP) brokers, they are also FedEx Ground ISP operators.
Black Iron Advisers exclusively represents their clients. As one of the few FINRA licensed investment banks serving the delivery route market, Black Iron Advisers can provide a level of service and flexibility that business brokers cannot match.