Submitted to Investment Real Estate by Terry Campbell, Live Oak Bank
After years of pent-up demand from no building, the self storage industry has seen significant growth in the last couple of years. 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.
Self storage has always been a profitable industry, but it took 57 years for it to become eligible for the SBA’s lending program. In 2010, owners with business experience and strong cash flows became eligible to qualify for loans partially guaranteed by the government. The industry can use SBA loans for ground-up construction projects, acquisitions, property expansion and rehab, debt consolidation, working capital, equipment and more.
The SBA 7(a) loan program allows owners to stay independent, has attractive equity requirements, 25-year fully amortizing terms, no balloons or financial covenants and allows working capital to be financed. It’s important to remember that no one loan product fits everyone, but understanding how the 7(a) program might benefit your business could be critical to your success.
SBA 7(a) loans are not without rules and regulations. The key is finding a lender who knows both SBA lending and the industry. Many banks have SBA divisions but do not offer a team that exclusively focuses on these types of loans.
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 acts on the SBA’s behalf.
What A Lender Looks for in a Borrower
SBA lenders look for many of the same traits in borrowers as conventional lenders do, often referred to as the 5 Cs: credit, character, commitment, collateral and cash flow. These variables immensely affect your ability to secure financing.
- Credit is a direct reflection of the borrower’s financial patterns. Many lenders prefer to see a credit score of over 700 and a detailed track record of the borrower’s spending habits. This can vary per lender.
- Character is apparent through a borrower’s historical working accomplishments and his or her plan for the overall success of the business.
- Commitment is how involved a borrower is with the project and is frequently determined by his or her willingness to put cash in the project.
- Collateral is measured with the number of assets a borrower has. The assets and their salability in the event of liquidation secure the loan. A benefit of SBA 7(a) loans is that they are not collateral-driven.
- Cash Flow is one of the most significant factors for SBA lenders. 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.
Having both your business and personal financials in order will dramatically increase your chances of getting a loan.
Why the SBA
The SBA 7(a) loan program is an excellent option for the self storage acquisitions. With flexibility and cash flow-driven lending, borrowers can feel secure in their business decisions. Live Oak Bank specializes in loans to the industry and has structured our lending and funding solutions around the industry’s specific needs. Visit our website to learn more.