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.
Loan Success Story
In 2016, John Lindsey, co-founder and president of the Lindsey Self Storage Group, was ready to expand his portfolio. Over the past 40 years, his company has developed and managed more than 100 facilities in the Southeast. When seeking capital to finance his latest project, Lindsey explored his options and ultimately chose an SBA loan. “SBA financing provided my company with a strong opportunity to acquire a new asset that has proved to be quintessential to the continued success of my company,” he says.
With a working-capital loan, Lindsey was able to take a property that was previously mismanaged with minimal cash flow and turn it into a new and improved facility. “This capital was put directly toward various capital improvements—both physically and operationally—that aided us in the repositioning of the asset in the market,” he says. “Without this type of loan, we wouldn’t have been able to take on a project of this capacity.”
Lindsey’s success story is just one of many. The SBA loan program has given self-storage owners and investors the opportunity to own their facilities and thrive in a growing market.
Choosing a Lender
When considering an SBA loan, finding a lender that focuses solely on SBA lending and has a background in self-storage will lead to a smoother and more transparent process. For this reason, it’s helpful to seek a lender who’s part of the SBA’s Preferred Lender Program (PLP). A PLP lender will know how to determine eligibility and properly structure the loan. PLP status allows a bank to approve the loan without waiting for the SBA approval, as it actually acts on the SBA’s behalf.
“Working with a lender with extensive knowledge of self-storage provided a seamless process from start to finish, which allowed us to move extremely quickly through the SBA process,” Lindsey says.
If you’re a current self-storage owner or looking to break into the industry, an SBA 7(a) loan may be just what you need. Do your research and find a lender that understands the SBA loan programs as well as the storage business.
Terry Campbell is general manager for the self-storage lending division of Live Oak Bank, which offers financing for facility acquisitions, construction, expansion, refinancing or renovation. He has more than 22 years of self-storage industry experience. For more information, call 910.202.6933; e-mail [email protected]; visit www.liveoakbank.com/self-storage.