The SBA 7 (a) Loan Program: Self-Storage Overview and Case Study
By Terry Campbell
You’ve probably thought a lot about how to start or grow your self-storage business. Do you want to build a new installation or acquire an existing one? What permits and documents do you need? More importantly, how are you going to get funding for your project? There are many loan options out there, but finding the one that meets your business needs is essential.
In 2010, the Small Business Administration (SBA) made its loan products available to self-storage properties. This has given industry owners wishing to acquire, build, expand or renovate facilities a new avenue of financing. The following overview of the SBA 7 (a) loan program provides an overview of its benefits and who is a good candidate for this type of financing. It also includes a case study of a storage operator who used this option to finance their most recent project and tips for choosing a lender.
Program 7 (a)
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 remain independent. Once you’re up and running, you can focus on your transaction instead of wondering how you’re going to make your next lump sum payment.
Unlike conventional loans, 7 (a) loans offer attractive equity injections, full amortization terms of 25 years, and no financial balloons or covenants. In addition, working capital can be financed and there is a prepayment penalty of only three years. It is important to remember that no loan product is right for everyone; but understanding how a 7 (a) program could benefit your business could be critical to your success.
Are you a good candidate?
If you are looking for money to expand your portfolio, an SBA loan may be a viable option. A strong candidate for this program has extensive experience in running a business or training in self-storage. To apply for a loan, you will need the following:
- Declaration summarizing the purpose of the loan
- Balance sheet established during the last 90 days
- Current income statement
- Tax declarations for the last three years (professional and personal)
- Personal financial statement
- Current tenant register and management reports for an existing self-storage business
- Feasibility study (if the loan is for a new construction project)
- Business plan and curriculum vitae
SBA lenders look for many of the same characteristics of borrowers as conventional lenders. These are often referred to as the Five Cs: Credit, Collateral, Character, Cash Flow, and Commitment. These variables greatly affect your ability to obtain financing:
- Credit is a direct reflection of your financial habits. Most lenders prefer to see a credit score of 700 or higher along with a detailed history of your spending habits. Criteria may differ depending on the bank, including what is considered an acceptable credit score.
- Collateral is measured by the number of assets you have to secure the loan and your ability to sell in the event of liquidation. One of the advantages of 7 (a) loans is that they are not tied to collateral; however, the loan should be fully secured if possible.
- Your character is assessed based on your historical professional accomplishments and your plan for the overall success of the business. It is important to have a comprehensive business plan in place.
- Cash to flow is the most important factor for an SBA loan. The bank will perform a cash flow analysis to determine if the business can be profitable while supporting its expenses and new borrowing debt.
- Commitment this is how involved you are in the project. It is often determined by your willingness to “get some skin in the game” as well as your work history.
Loan success story
In 2016, John Lindsey, co-founder and chairman of the Lindsey Self Storage Group, was ready to expand his portfolio. Over the past 40 years, his company has developed and managed over 100 facilities in the South East. While looking for capital to fund her latest venture, Lindsey explored her options and ultimately chose an SBA loan. “The SBA funding has provided my business with an excellent opportunity to acquire a new asset which has proven to be critical to the continued success of my business,” he said.
With a working capital loan, Lindsey was able to take a previously poorly managed property with minimal cash flow and turn it into a new improved facility. “This capital has been allocated directly to various capital improvements, both physical and operational, which have helped us reposition the asset in the market,” he says. “Without this type of loan, we would not have been able to undertake 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.
Choose a lender
When considering an SBA loan, finding a lender who only focuses on SBA loans and has self-storage training will lead to a smoother and more transparent process. For this reason, it is worth looking for a lender who is part of the SBA’s Preferred Lender Program (PLP). A PLP lender will know how to determine eligibility and properly structure the loan. The PLP status allows a bank to approve the loan without waiting for approval from the SBA, as it is actually acting on behalf of the SBA.
“Working with a lender with in-depth knowledge of self-storage provided a seamless process from start to finish, which allowed us to move extremely quickly through the SBA process,” says Lindsey.
If you are currently a 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 who understands SBA loan programs as well as the storage industry.
Terry Campbell is Managing Director of Live Oak Bank’s Self-Service Storage Loans division, which provides financing for the acquisition, construction, expansion, refinancing or renovation of facilities. He has over 22 years of experience in the self-storage industry. For more information, call 910.202.6933; E-mail [email protected]; visit www.liveoakbank.com/self-stockage.