Understanding Your SBA Loan Options: An Overview for Self-Storage Developers, Investors and OwnersUnderstanding Your SBA Loan Options: An Overview for Self-Storage Developers, Investors and Owners
The Small Business Administration offers two loan programs that are suitable for use in the self-storage industry. This article explains what they are and how they can be applied to help developers, investors and owners meet their business goals. Read about the benefits and challenges of each and the factors that determine which is the best fit for your needs.
January 18, 2025

Financing matters in the self-storage industry. Whether you’re making an acquisition, expanding or refinancing an existing facility, or developing a new site, the right loan is often critical to success.
While the capital markets can seem vast and intimidating, there are a few simple, dependable loan options that can help you pave your path to prosperity. They include conventional bank financing, with which many of you are already familiar. There are also two very good programs available through the Small Business Administration (SBA): 7(a) and 504.
If you’re looking for a loan that delivers multiple advantages for new self-storage owners, both SBA programs are excellent choices. They provide significant leverage, typically covering 85% to 90% of the total project cost, which allows you to contribute just 10% to 15% as a down payment. The lower requirements make them ideal for first-time owners looking to maintain their liquidity while getting their business off the ground.
Various factors come into play when choosing which SBA loan option is best for your needs, including your circumstances, financial goals and risk tolerance. Let’s take a closer look.
The SBA 7(a) Loan Program
SBA 7(a) loans are an excellent option for various self-storage project types, including acquisitions, expansions and start-up construction. They can be used to finance all costs associated with acquiring land or buildings, including closing costs, as well as hard and soft construction expenses. In fact, this program’s flexible structure and down-payment options make it an excellent choice for those developing their first self-storage facility.
For self-storage construction projects, the 7(a) program provides interest reserves and capital to cover any operating deficit during lease-up. This alleviates pressure on the owner to make loan payments before the business can generate enough revenue to support the debt. Here are some other primary benefits of this loan type:
Under this program, real estate loans can have terms of up to 25 years, while construction loans can extend to 26 years.
These loans are fully amortized without balloon payments and have no financial covenants related to debt-service coverage or loan-to-value ratios.
New owners can secure up to 90% financing, while established owners with a stabilized, cash-flowing self-storage property that has been operational for at least a year can qualify for up to 100%.
SBA 7(a) loans can offer interest-only payment options for 12 to 36 months before transitioning to principal and interest payments.
The SBA 7(a) program has a maximum limit of $5 million per project, though some banks may be willing to lend more for larger projects through a pari-passu loan.
Prepayment penalties for SBA 7(a) real estate loans are tiered at 5% for year one, 3% in the second year and 1% in the third year from the closing date.
These loans are partially backed by the government, reducing the risk for banks that are lending on the project.
While the 7(a) program offers many benefits, it also has a few drawbacks. First, there’s no origination fee, but there is an SBA-guarantee fee, which funds the program and varies based on loan size. It typically ranges from 0% to 2.5%. Higher leverage, longer-term amortization options and a flexible use of proceeds typically result in higher interest rates than conventional bank or 504 loans.
The 7(a) program has many nuances. If you plan to pursue it, seek a lender with Preferred Lender Program status. This indicates that they have experience with these loans and are qualified to make credit decisions at the bank instead of sending every loan to the SBA for approval. This expedited process can reduce the closing timeline by three to four weeks, as underwriting, credit approval, closing and loan disbursement can occur in-house.
The SBA 504 Loan Program
There are significant differences between the he SBA 504 loan program and the more common 7(a). For example:
SBA 504 loans can be used to finance larger self-storage projects, up to approximately $15 million.
The 504 loan structure typically involves a 50% bank loan from the lender, 35% to 40% through an SBA debenture, and 10% to 15% equity from the borrower.
Due to the blended rate, the interest-rate options for 504 loans are often more attractive than those for the 7(a) program.
SBA 504 loans may include an extended interest-only period and interest reserve to help with loan repayment during construction.
There are a few other key points to remember about SBA 504. Unlike the 7(a), these loans can’t be used to provide working capital, which can be a challenge if you need additional operating funds during lease-up or while financing a self-storage construction project. Also, the SBA debenture portion of a 504 loan carries a longer prepayment penalty (10 years). While you may have a lower, fixed rate for that portion of the loan, refinancing could result in higher penalties than with an SBA 7(a) or conventional bank loan. Finally, a 504 loan typically involves a first-mortgage fee and a bridge-loan fee determined by the lender.
An SBA 504 loan is a collaborative effort between your lender, a Certified Development Corporation local to your self-storage project and the SBA. It can be more complex because you must receive approval from all three entities; however, it’s an excellent option for larger projects, particularly those involving construction.
Comparing SBA Loans to Conventional Loans
When it comes to conventional financing, it’s important to remember that each bank has its own structure. Generally, these loans offer more flexibility in terms and recourse than the SBA programs, but they may have stricter requirements for covenants and deposits.
Conventional bank loans allow self-storage lenders and borrowers to negotiate terms that suit both parties, including prepayment penalties, origination fees, loan term and amortization, balloons, and covenants. For example, a bank may include a three-year prepayment penalty, a 1% origination fee, 36 months of interest-only payments, and a five-year balloon with some debt-yield covenants. However, the terms can be negotiated based on risk tolerance.
Conventional bank loans typically offer a lower interest rate than SBA loans due to the lower leverage and higher liquidity requirements typically warranted by the lender.
Finally, bank loans are typically less leveraged than SBA loans, with the average loan-to-value/loan-to-cost ratio ranging from 60% to 75%. They’re more suitable for individuals with self-storage industry experience, higher net worth and strong personal liquidity.
Final Thoughts
There are many financing options available for self-storage developers, investors and owners. The SBA 7(a) and 504 programs are only two of them. Each has its own pros and cons. The best option for you will depend on your specific needs. The 7(a) loan is ideal for those who are new to ownership and require more liquidity, while 504 loans are often better-suited for larger projects.
A seasoned self-storage lender can help you find the perfect fit. Whether you’re acquiring a new facility, refinancing an existing loan, expanding your business or building a new project, a good relationship with a lender is crucial to long-term success. It’s essential to work with a partner who understands the available loan products and the nuances of the self-storage industry.
Amber Crucian is assistant vice president of self-storage financing at Live Oak Bank. A subsidiary of Live Oak Bancshares Inc. and headquartered in Wilmington, North Carolina, the company serves small-business owners in all 50 states. Crucian has nine years of finance experience. She worked with Wells Fargo Advisors and Vanguard prior to joining Live Oak in 2019, in the business-analyst group for the healthcare team. In 2022, she moved to self-storage lending as a loan officer. To reach her, call 336.817.7754 or email [email protected].
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