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The SBA 7(a) Loan Program: A Self-Storage Overview and Case Study

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By Terry Campbell

You've probably thought a lot about how to start or expand your self-storage business. Do you want to build a new facility or acquire an existing one? What permits and paperwork do you need? Most important, how will you obtain financing for your project? There are many loan options available, but finding the one that meets your business needs is key.

In 2010, the Small Business Administration (SBA) made its loan products available for self-storage properties. This gave industry owners who were eager to acquire, build, expand or renovate facilities a new financing avenue. The following overview of the SBA 7(a) loan program provides insight to its benefits and who makes a good candidate for this type of funding. It also includes a case study of a storage operator who tapped this option to fund his most recent project and advice for choosing a lender.

The 7(a) Program

The SBA 7(a) loan program is an attractive option for self-storage owners because it allows them to acquire, build and renovate facilities while allowing them to stay independent. Once you’re up and running, you can focus on your operation instead of wondering how you’ll make your next balloon payment.

Unlike conventional lending, 7(a) loans offer attractive equity injections, 25-year fully amortizing terms, and no balloons or financial covenants. Additionally, working capital can be financed, and there’s a prepayment penalty of only three years. It’s important to remember that no one loan product fits everyone; but understanding how a 7(a) program might benefit your business could be critical to your success.

Are You a Good Candidate?

If you’re looking for money to expand your portfolio, an SBA loan can be a viable option. A strong candidate for this program has ample experience running a business or a background in self-storage. To apply for a loan, you’ll need the following:

  • Statement summarizing the purpose of the loan
  • Balance sheet prepared within the past 90 days
  • Current profit-and-loss statement
  • Tax returns from the past three years (business and personal)
  • Personal financial statement
  • Record of current tenants and management reports for an existing self-storage business
  • Feasibility study (if the loan is for a new construction project)
  • Business plan and résumé

SBA lenders look for many of the same traits in borrowers as conventional lenders. These are often referred to as the five Cs: credit, collateral, character, cash flow and commitment. These variables immensely affect your ability to secure financing:

  • Credit is a direct reflection of your financial patterns. Most lenders prefer to see a credit score of 700 or higher as well as a detailed track record of your spending habits. Criteria may differ by bank, including what’s considered an acceptable credit score.
  • Collateral is measured by the number of assets you have to secure the loan and your saleability in the event of liquidation. A benefit of 7(a) loans is they’re not collateral-driven; however, the loan must be fully collateralized if possible.
  • Your character is evaluated through your historical working accomplishments and plan for the overall success of the business. It’s important to have a thorough business plan in place.
  • Cash flow is the most significant factor for an SBA loan. The bank will perform a cash-flow analysis to determine whether the business can be profitable while also supporting its expenses and new loan debt.
  • Commitment is how involved you are with the project. It’s frequently determined by your willingness to “have some skin in the game” as well as your employment history.
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