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Small Business Administration Loan Programs: A Guide for Self-Storage Borrowers

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By Terry Campbell

The backbone of this country has always been small businesses; if they suffer, so does the economy. Access to capital has often been difficult for these enterprises, and following the economic crisis of 2008, it was nearly impossible.

The Small Business Administration (SBA) was established in 1953, but it took 57 years for self-storage borrowers to become eligible for its lending program. In 2010, the SBA announced it would grant banks the ability to provide its loans to our industry. At the time, many facility owners didn’t have the funds to build or buy existing properties. This announcement allowed those with strong cash flow, positive feasibility studies and business experience to qualify for loans that are partially guaranteed by the government.

Let’s take a closer look at how SBA loans work and how you can qualify for this unique lending opportunity.

Advantages to SBA Loans

For most borrowers, banks typically come to mind as a traditional source of credit. However, there are advantages to using an SBA program. For example:

  • SBA 7(a) loans have a 25-year fully amortizing term, high-leverage down payments, and no balloons or financial covenants such as loan-to-value and debt-service coverage ratios.
  • Most conventional bank loans typically require a down payment of approximately 25 percent. Sometimes it’s less or more depending on the bank, the project and the borrower relationship. SBA loans are based on a cash-flow analysis of the potential project or existing facility. Interest-only payments during construction and lease-up can also be included.
  • The 7(a) loan program has a short, three-year prepayment penalty.

Because of these benefits, small-business owners who lack the full amount needed for a conventional bank loan may be able to use the 7(a).

Conventional commercial loans have never been easy for small businesses to obtain, and since the financial crisis, banks have further tightened their lending standards. When applying for a loan with a traditional bank, expect to supply several years of financial statements and show a history of consistent growth. In contrast, if a loan meets the $5 million limit for the 7(a) program, some banks can make this loan with a companion conventional and still take advantage of the 7(a)’s benefits. If not, an SBA 504 loan can be used.

A 504 loan, also known as a Certified Development Company (CDC) loan, allows owners and investors to obtain additional financing. A CDC is a nonprofit organization established to enhance the economic development of a community. A 504 loan consists of a relationship between the CDC, lender and SBA. With a 504 project, the borrower is generally eligible for long-term financing—20-year, full-term, fixed-rate on the CDC-provided portion of the loan.

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