Financing Options for Self-Storage Businesses
If you’re buying, building, renovating or running a self-storage facility, you’ll likely need some sort of financing. Fortunately, you have several options for financing a self-storage business.
“Borrowers should do their homework when trying to discern the right loan option and lender for their business and connect with lenders early on in the process,” said Alex Cohen, CEO of Liberty SBF, a business lender.
“You want to work with a reliable lender that has years of lending and investment experience, a vast network of relationships, and the ability to source, structure and underwrite complex transactions for its borrowers,” Cohen added.
According to FitSmallBusiness, criteria usually required to qualify for self-storage business financing include:
- Minimum credit score of 680.
- Minimum down payment of 10%.
- At least two years in business.
- No recent bankruptcies, tax liens or foreclosures.
Below we cover 9 alternatives for financing a self-storage business:
- SBA 504 loans for self-storage
- SBA 7(A) loans for self-storage
- Conventional loans for self-storage
- Bridge loans for self-storage
- Hard money loans for self-storage
- Construction loans for self-storage
- Mezzanine loans for self-storage
- Working capital loans for self-storage
- Lines of credit for self-storage
Cohen called SBA 504 loans “one of the best financing options for self-storage.” They can be a good option if you’re not able to qualify for conventional financing.
The Small Business Administration (SBA) says a 504 loan offers long-term, fixed-rate financing of up to $5 million to buy, build or renovate a self-storage facility. Repayment terms are 10, 20 or 25 years.
To qualify for an SBA 504 loan, you must:
- Operate as a for-profit company in the U.S.
- Have a tangible net worth of less than $15 million.
- Have an average net income of less than $5 million after federal income taxes in the two years before your application.
- Have management expertise.
- Present a “feasible” business plan.
- Demonstrate the ability to repay the loan.
SBA 504 loans are available through community development corporations, or CDCs. Both a CDC and a bank or credit union contribute financing for an SBA 504 loan. In most cases, the borrower must come up with a 10% down payment.
A 504 loan consists of a conventional first mortgage, typically for 50% of the project cost, from a third-party lender. The SBA-backed portion of the 504 loan will be a second mortgage, accounting for up to 40% of the financing.
The 7(a) program is the SBA’s most popular lending program. SBA 7(a) loans primarily provide financial assistance to small businesses, including those operating in the self-storage sector. The maximum length of a 7(a) loan is 25 years.
Among the 7(a) options are standard and small loans. A standard 7(a) loan offers as much as $5 million. Meanwhile, what’s known as a 7(a) small loan provides up to $350,000. A lender and borrower negotiate the interest rate for a 7(a) loan, but the rate can’t exceed the SBA’s limit. Typically, the rate is 5.5% to 8%.
Proceeds from a 7(a) loan can go toward purposes such as:
- Providing short- and long-term working capital.
- Refinancing business debt.
- Purchasing furniture, fixtures and supplies.
- Buying land or structures.
- Building or renovating a structure.
Banks and credit unions extend conventional loans for self-storage businesses. But not everybody will qualify for a conventional loan.
According to Live Oak Bank, a self-storage lender, many lenders want a borrower to put up 25% to 35% in equity in order to feel secure about underwriting a conventional loan. So, for a $1 million deal, you’d need to have $250,000 to $350,000 in cash.
Live Oak Bank explains that a conventional loan features a short term, such as five or 10 years, meaning the loan likely will need to be refinanced.
Live Oak Bank recommends looking beyond the interest rate when you’re shopping for a conventional loan. Questions you should ask include:
- How much will the down payment be?
- How much working capital will you need to support the project?
- What are the prepayment penalties?
“Like any loan, conventional loans have their pros and cons, and it’s important to weigh them when looking at your self-storage financing options,” according to Live Oak Bank.
Lenders generally provide bridge loans ranging from $1 million to $10 million, according to Cohen. A bridge loan, typically with a term of six to 48 months, enables temporary financing until a permanent loan can be obtained.
Bridge loans are ideal for self-storage facilities that are undertaking renovation or expansion projects. These loans normally are backed by collateral. One drawback: Because they’re short-term arrangements, bridge loans frequently come with higher interest rates than longer-term loans.
Hard money loans aren’t cheap. This short-term financing option comes with high interest rates, as the loans typically are geared toward borrowers with poor credit or whose self-storage properties are in bad shape.
As the name indicates, construction loans are designed to finance a construction project. According to the Fundera lending platform, construction loans usually require a down payment of up to 25% of the project’s cost.
“Then, you’ll make smaller, monthly payments at a pretty fair rate, and your term length will be about as long as it takes to complete the construction project,” Fundera points out. “But be aware that there’ll be a balloon payment at the end, when you’ll be asked to repay a large portion of what you owe in a single payment.”
Caffrey & Co., whose lending products include self-storage loans, explains that a mezzanine loan comes into play when the lender for your first mortgage won’t lend as much money as you need to seal a deal. In that sense, it’s similar to a second mortgage. Interest rates for a mezzanine loan may be 10% to 30%.
Collateral for a mezzanine loan usually isn’t the real estate itself but rather is your ownership interest in the property.
If you can’t qualify for an SBA or bank loan, you may be able to obtain a working capital loan, which is aimed at covering short-term expenses, such as inventory and operating costs.
Rates and terms for these loans vary greatly, according to Live Oak Bank. One of these loans may, for example, be three years in length with an interest rate of 20% to 29%. A high credit score and a record of profitability may help improve the loan terms.
A line of credit also may help pay short-term expenses for a self-storage business. You use a line of credit only when you need it and pay interest when you use it, according to Fundera. In that regard, it’s similar to a credit card.
Funding your self-storage business
Consider working with a capital advisor to help you navigate the various commercial real estate financing sources available to you, and find the best fit for your mini storage business. Whether you are seeking funds for new construction or to refinance an existing loan, choosing the right loan program is extremely important for the long-term health of your self-storage operation.
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