Debunking 5 Myths About SBA Lending, Plus Why It’s a Good Option for Self-Storage Owners and Investors

The Small Business Administration (SBA) offers lending programs that are often misunderstood as cumbersome, last-resort loan options. Much of this misperception is centered around borrower experiences with banks that don’t specialize in this kind of funding or have expertise in the self-storage industry. Below, I’ll attempt to debunk the common myths about SBA financing, so you can determine if this option is right for you.

Myth 1: SBA Products Aren’t Borrower-Friendly

This isn’t true. In fact, it’s the opposite! When compared to conventional funding, SBA loans are generally more flexible with equity and collateral requirements. They also have longer repayment terms, and no financial covenants or balloon payments.

For example, a conventional self-storage loan may have a 20-year amortization with a balloon in five years, while an SBA loan offers a 25-year amortization and term with no balloon payment. In most cases, the industry-standard interest rates charged under the SBA are also more favorable than a bank loan.

Myth 2: The Lending Process Is Slow and Inefficient

While SBA lending requires numerous documents and can be tedious for borrowers when the lender isn’t a specialist, for the most part, the amount and type of information required is the same as for a conventional loan. To streamline the process, it’s helpful to work with a lender that’s part of the SBA’s Preferred Lender Program (PLP).

A PLP lender will know how to determine eligibility, properly structure the loan and collect appropriate documents to keep things moving smoothly. PLP status allows the bank to approve the loan without waiting for the SBA’s approval. In other words, the bank acts on behalf of the SBA.

Myth 3: The SBA Lends Money Directly to Small-Business Owners

False! With an SBA loan, the bank makes the loan, but the debt is partially guaranteed by the SBA. This allows the bank to provide credit for a borrower who may otherwise have difficulty obtaining a loan with such favorable terms. The SBA essentially acts like an insurance company, allowing the bank to extend beyond its conventional credit reach. Plus, there’s no separate approval from the SBA, which means PLP lenders can approve and close loans on their own timelines.

That said, the existence of the guarantee doesn’t outweigh competent underwriting. There are certain eligibility requirements that apply to all lenders within the SBA program. Beyond those, a lender will apply its own judgment and standards by exploring the five Cs of the borrowing business: character, capital, conditions, collateral and cash flow. A good lender that knows both the SBA and the self-storage industry has the knowledge to understand these components as they relate to business ownership and can evaluate your entire financial picture to structure a loan that best meets your needs.

Myth 4: SBA Loans Are Only for Certain Types of Businesses

The old-school perception that the SBA program is only for underperforming businesses or borrowers with bad credit is a myth. In fact, it can be used to finance sophisticated businesses with high-end loan structures. Self-storage customers with a multi-million-dollar net worth can still qualify.

Myth 5: SBA Loans Require Extensive Collateral

Again, not true. SBA loans require an 85% loan to value (LTV). If the self-storage asset clears this hurdle, no additional collateral may be required. The program guidelines do require lenders to take certain available collateral such as junior liens on real estate, which has available equity if the facility doesn’t reach the 85% LTV threshold. However, it also specifically states that a borrower who lacks such collateral and is otherwise creditworthy shouldn’t be turned down. Therefore, a business with only four of the five Cs noted above (i.e., lacking collateral coverage) can still obtain a loan.

For those with little or no real estate to pledge, it’s important to find a lender that’s skilled at and comfortable with relying on the financial strength of the business for repayment. Lenders without an understanding of self-storage will default to a mindset in which they seek hard assets to secure a loan. So, it’s important to find a partner that understands the value of your self-storage business through the lens of industry expertise.

SBA loans can be a great option for self-storage owners looking to grow their business and entrepreneurs seeking to enter the industry. They can provide longer terms, no balloon payments and little to no money down. To find out more about whether this option will work for your needs, connect with a PLP lender.

Anna Taylor joined Live Oak Bank in 2013 as a loan officer. With a background in credit and financial analysis, she’s committed to helping clients navigate the loan-application process. Live Oak Bank is a subsidiary of Live Oak Bancshares Inc. Headquartered in Wilmington, North Carolina, it serves small business owners in all 50 states. For more information, call 866.518.0286.