Need financing for a route?
The most critical thing with a loan is it’s interest rate. But not so fast, it’s not as cut and dry as you might expect. So put down the pen for all those SBA loan applications. And while you’re at it, shred that business plan you’re drafting up for the meeting with the bank next week. Why? Because routes are different than other types of businesses in how they run as well as how they’re financed. One step at a time here…
Your First Step – Determining loan interest rates for financing FedEx routes
First, if you could get a loan on a route, what’s the max interest rate you’d pay?
7% sound fair? Maybe 12%? Perhaps 20%? Up to 35% interest?!
Before you find that loan shark that offers you a loan at 35% and you say, “That’s insane! I want 7% or nothing!” You need to think again. It’s not like buying a car where you demand 0% APR when you drive off the lot. This isn’t like a mortgage where you’re only interested if you can get under 6%. And this isn’t like a store credit card where you only want the card if it’s under 12%. This is a route, and the whole game changes when it comes to loans.
You’re probably used to interest rates in regards to something that isn’t really producing you income.
Because of this, you think of wanting interest rates to be under
a certain amount. But you’re going to need to consider the mind blowing returns that routes can provide you.
This isn’t the stock market where investors are happy to make 8% a year on average…if they’re lucky.
The formula is simple. If a route is generating more money than you’re paying in interest, the loan is probably worth it. When I look at a business loan for a route, I don’t care about the interest rate by itself. I care about the spread between the ROI and the interest rate only and seeing if I can live on that amount.
TAKING LOANS WITH RIDICULOUS INTEREST RATES:
I’d take a loan with an interest rate at 40% all day long for a route! Why? Let’s say I didn’t have a penny to my name and I found a pile of routes for $1 million and they were netting $500,000, then if I took out a million dollar loan at 40% interest over a 15 year repayment schedule, I’d pay $33,424 a month in my loan payment. But I’d be making $41,666 each month. The difference between my income and payment brings me to right about netting $100k for the year. Would you take the loan? Sure! Because at the end of that 15 years, you’ve got a million in equity on top of having made a six figure salary the whole time. Not bad vs having nothing at all.
At that point, your friends will finally see the light on why you took that “crazy loan.”
So a couple things here to note that are important:
First, don’t just look at a loan and think it’s good or bad based on the interest rate only – you’ve got to see the ROI on your route before you know if a loan is good for you. Also, you often won’t have the luxury of getting a cheaper rate since route loans are hard to come by. Obviously, you want to pay the least amount for a route and get a loan with the lowest interest rate. But sometimes you’ve got to accept what’s out there when it seems ‘good enough.’
Second, condition your mind to understand that it’s not uncommon for routes to return 30-60% on your money depending on a lot of things. This takes a while to sink in when you’re used to lower returns like in real estate, the stock market, or that sweet collection of stamps you’ve been saving since you were a kid. Yes, I know people that have made killings in real estate and stocks, but it definitely seemed like a much higher degree of risk than I’m willing to entertain.
Need help figuring out what a realistic ROI is going to be on a route you’re looking at? Consider moving forward with one-on-one consultation. I’d love to work with you.
Next, I’ll be discussing why applying for loans in a conventional sense is a waste of time. I’ll be explaining how financing for FedEx routes, Mission Tortilla routes, and financing for bread routes can differ.
Finally, I’ll be discussing an extremely unconventional method of getting financing for routes for people just getting started in the route world.