More than likely, you've heard about Small Business Administration loans, but you might be unsure if it's a good option for your current or future self-storage investment. This article provides answers to the top five questions owners and investors have about this lending program. Read on to see if this type of financing might be right for you.
Small Business Administration (SBA) loans are an excellent option for self-storage investors and owners. They can be used for various purposes, including acquiring or expanding an existing facility, purchasing land for a development, financing new construction, or buying long-term equipment and machinery. The following provides answers to the five common questions most people have about this lending opportunity.
While the SBA doesn't lend out money directly, it guarantees a portion of each loan it makes, reducing risk for participating lenders and incentivizing them to lend to small businesses. The goal of is to provide financial support to entrepreneurs and small-business owners, fostering economic growth. The guarantee enables borrowers to secure financing with more attractive terms than conventional loans.
Leverage is the primary factor that attracts self-storage borrowers to the SBA lending program. With up to 90% financing on acquisitions and new construction and minimal cash-injection requirements for expansions, SBA loans require less equity than conventional financing. This makes ownership more accessible for many people and can prevent them from diluting their stake by taking on investors.
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Additionally, some banks may be more open to lending to first-time self-storage investors and owners if they're financing a transaction with an SBA loan. For conventional loans, they may require industry experience.
SBA financing is also flexible. For example, with a 7(a) loan, you can build an interest-only period into the program, use working capital to take care of deferred maintenance, or make minor improvements.
The SBA offers several programs, each tailored to meet different business needs. The two most common for self-storage borrowers are 7(a) and 504.
SBA 7(a) loans are the most popular and flexible. They offer up to $5 million for a range of business purposes.
SBA 504 is designed to finance fixed assets including equipment, machinery and real estate.
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While SBA loans offer numerous advantages for self-storage borrowers, they also come with specific challenges:
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Working with an experienced lender is essential. Look for one with PLP status. This indicates that they understand SBA lending and can approve 7(a) loans without requiring separate SBA approval, which can significantly expedite the process. You should also seek a lender who understands the self-storage industry. You don't want to have to educate your banker on how the business operates.
It's also critical to prepare a detailed and thorough loan application. You must present solid financials and demonstrate your professional knowledge to convince a lender that your business is worthy of the loan.
Common mistakes include submitting inadequate or inaccurate financial documents, or failing to disclose past financial or legal issues. These can automatically disqualify you. To avoid these pitfalls, ensure all your documents are accurate and well-organized. This includes having a strong, clear self-storage business plan that details precisely how you'll use the requested funds.
SBA lenders prioritize your ability to repay the loan, so you must demonstrate financial strength, good personal and business credit, and detailed projections. Before you apply, gather all essential documents including individual and business tax returns as well as business and personal financial statements. If you're considering a loan for a self-storage acquisition, development, refinance or expansion but aren't ready to apply, you can learn more about the process by consulting with a prospective lender.