An SBA loan may be used to finance the start-up, purchase, or refinance of Federal Express (Fed Ex) delivery routes. This type of transaction is unique and nuanced, and it is important for SBA lenders to understand certain key points when providing financing for this type of business. This article is intended to highlight some key points.
Fed Ex uses different types of operating agreements with its providers depending on the type of service to be provided, such as:
- Independent Service Provider (ISP) Agreement
- Linehaul Agreement
- Home Delivery Operating Agreement
- Pick-up and Delivery Operating Agreement
- Ground Package System Agreement
Each loan transaction will include at least one (sometimes several) of the Fed Ex operating agreements described above. The Fed Ex operating agreement will identify (i) the “Contracted Service Area” or “CSA” number; (ii) various zip codes that the routes cover; (iii) the specific vehicles used to run the routes; and (iv) the Fed Ex terminal location where the vehicles will be stored overnight when not on route. SBA lenders should request copies of all of the Fed Ex operating agreements as early in the process as possible to determine if there are any issues that need to be resolved. It is not unusual for the term of the Fed Ex operating agreement(s) to be shorter than the SBA loan term, and the borrow may need to apply for renewals. SBA lenders should review the renewal requirements carefully to determine their comfort level with the contract term.
The borrower should provide a fully-executed Fed Ex operating agreement prior to closing. If the borrower is purchasing a route from a seller, the borrower should obtain a copy of the seller’s fully-executed Fed Ex operating agreement(s) and Fed Ex’s approval of the assignment from the seller to the buyer. The lender should confirm that Fed Ex has approved the borrower as the new operator prior to closing, and the parties should execute the assignment at closing. The lender should include this information in the credit memo with references to the documentation received.
The vehicles that the borrower will use on the Fed Ex routes should be specifically identified in both the purchase agreement and the Fed Ex operating agreement. These vehicles will become collateral for the loan, and the lender should verify the vehicles are transferred to the borrower post-closing and the lender’s lien is placed on the certificate of title. If any vehicle has an electronic title, the seller can go to the DMV to request a paper title to bring to closing. It may be useful to use a vehicle escrow of seller proceeds pending the transfer and placement of the lender’s lien on the vehicle titles. This ensures the process is completed in an efficient and timely manner to secure the main collateral for the loan.
Although the vehicles are stored at the Fed Ex terminal, it is not considered a leased premises and therefore a landlord waiver is not required nor will Fed Ex sign one. We understand the lender’s concern that it would not have 24/7 access to the vehicles if the loan was to default, because the vehicles are kept overnight at the Fed Ex terminal. To mitigate this concern, the borrower can sign an affidavit at closing stating that upon the lender’s request, the borrower agrees to remove all packages from the vehicles and allow the lender to access the vehicles at an agreed upon location outside of the Fed Ex premises. The lender should also include an explanation in the credit memo that addresses this topic.
For more information regarding considerations when financing a Fed Ex delivery route via an SBA guaranteed loan, please contact us at info@starfieldsmith.com or (215) 542-7070.
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