The Basics of Seller Financing
If you are looking to finance your route investment, you will need to put down approximately 5-25% of the purchase price. The down payment varies based on your loan source: Small Business Association (SBA) loans tend to require less down payment while conventional banks ask for higher amounts.
One strategy for acquiring sufficient down payment funds is to reduce the loan amount. Obviously, that can mean purchasing a less expensive route. However, it can also mean reaching a financing deal with the seller.
This is called seller financing.
What is seller financing?
A FedEx route deal with seller financing means that the seller essentially loans you part of the cost of your purchase and you will pay back the seller this portion of the price (usually with interest). Rarely does a FedEx route seller provide all of the financing for a deal.
A seller financed deal will look something like this:
Buyer wishes to purchase a route for $1,000,000 and they have $100,000 cash on hand for the down payment.
However, their funding source informs them that with a $100,000 down payment they will provide a maximum loan of $500,000 (so that their liquid assets are 20% of the purchase).
Now we have a gap: $1,000,000 purchase price minus the $500,000 loan.
Here is an instance where a seller may offer seller financing to get the deal done. Seller financing counts as paid in capital in the eyes of the bank. If a seller agrees to cover $100,000 of the purchase price under separate seller financing loan terms, this seller financing amount combined with the buyers $100,000 in cash would combine to function together as the down payment.
At $200,000 combined buyer down payment and seller financing, the buyer is effectively putting 20% down on the $1,000,000 purchase price. This gives everyone a much better chance of closing the deal.
Buyers work out separate repayment terms with the seller for the $100,000 financing.
How can seller financing benefit buyers?
Seller financing can often help cash-strapped buyers afford higher cost routes. It can also help buyers who have plentiful cash on hand, but struggle to secure additional funding via the SBA or a bank.
How can seller financing benefit sellers?
It gets the deal done! And, oftentimes, allows the seller to offload the route more quickly since seller financing is an attractive option to many buyers.
What are some of the risks?
Clearly, a seller risks the possibility of a buyer defaulting on their loan. And oftentimes, these seller financing arrangements put them last in line for recourse—behind a bank.
Additionally, if the buyer is funding part of their purchase with an SBA loan, many SBA rules prevent buyers from paying back a seller until the SBA loan is paid in full. Which is an unappealing arrangement to many sellers.
What can buyers do to make this seller financing a more attractive option for sellers?
Many sellers are opposed to offering seller financing because of the risks laid out above, but for the right offer, some sellers will consider it.
Buyers that know they need seller financing to complete a deal can offer a higher purchase price than they otherwise would to offset seller financing risk.
Moreover, buyers could look to allocate some type of specific collateral to give the seller piece of mind behind the note. This could include other real estate, businesses, or investments that they own.
Considerations Other Than Seller Financing
If you as a buyer are unable to reach a deal with a seller on seller financing, you are not out of options!
One alternative to seller financing could be that you, the buyer, assume any existing debt from the operation’s vehicles. If there is existing debt, the seller may be willing to reduce the overall purchase price when you agree to take on responsibility for vehicle debt.
Our Route Consultant team is available to help you think through your offer and purchase options.
Looking for a Route with Seller Financing Available?
While you can talk about seller financing as part of any negotiation, we have a few routes where we know sellers are more open to the arrangement.
The following Route Consultant listings have sellers that may consider seller financing:
As always, our team of consultants is an excellent resource for you to talk through possible offers.