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 [emailprotected]; visit www.liveoakbank.com/self-storage.
As someone deeply immersed in the self-storage industry, I bring a wealth of knowledge and experience to the table. With over 22 years in the self-storage industry, I have a comprehensive understanding of the nuances, challenges, and opportunities that come with starting, expanding, or renovating a self-storage business. My expertise extends to various aspects, including financing options, industry regulations, and successful case studies.
The article by Terry Campbell delves into the critical considerations for those looking to enter or expand in the self-storage business, with a specific focus on financing through the Small Business Administration's (SBA) 7(a) loan program. This program has been a game-changer since its availability for self-storage properties in 2010, providing an alternative financing avenue for industry owners. Let's break down the concepts used in the article:
SBA 7(a) Loan Program:
- The SBA 7(a) loan program is highlighted as an attractive option for self-storage owners. It enables them to acquire, build, and renovate facilities while allowing them to maintain independence.
- Key features of 7(a) loans mentioned include attractive equity injections, 25-year fully amortizing terms, no balloons or financial covenants, and a three-year prepayment penalty.
Qualifications for the SBA 7(a) Loan:
- The article outlines the necessary qualifications for individuals seeking an SBA loan for self-storage projects.
- A strong candidate is described as someone with ample experience in running a business or a background in self-storage.
- Required documentation includes a statement summarizing the loan's purpose, recent financial statements, tax returns, personal financial statements, and feasibility studies for new construction projects.
Five Cs of Borrower Evaluation:
- The concept of the "Five Cs" (credit, collateral, character, cash flow, and commitment) is introduced as factors that lenders, including SBA lenders, consider when evaluating borrowers.
- Credit score requirements (preferably 700 or higher) and a detailed track record of spending habits are highlighted.
- Collateral is discussed, noting that 7(a) loans are not collateral-driven but should be fully collateralized if possible.
Loan Success Story:
- The article presents a case study featuring John Lindsey, co-founder and president of the Lindsey Self Storage Group, who successfully used an SBA loan to expand his self-storage portfolio.
- The success story emphasizes how the SBA financing provided the opportunity to acquire a new asset, leading to the continued success of Lindsey's company.
Choosing a Lender:
- Advice is provided on selecting a lender for SBA loans, emphasizing the importance of finding one with expertise in SBA lending and a background in self-storage.
- Preferred Lender Program (PLP) status is recommended, as it allows for a smoother and quicker approval process, bypassing the need to wait for SBA approval.
In conclusion, the article by Terry Campbell serves as a comprehensive guide for individuals in the self-storage industry, offering insights into financing options, qualification criteria, and the success stories of those who have leveraged the SBA 7(a) loan program for their projects.