5 Questions on Using SBA Loans for Self-Storage

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.

How Do SBA Loans Work?

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.

Why Should I Consider an SBA Loan?

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.

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.

What Are the Various Programs?

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.

Pros: 7(a) offers flexibility by allowing working capital and interest-only periods. For lenders with Preferred Lender Program (PLP) status, the time to close is faster, as no separate SBA approval is needed in most circumstances. The loan also features a shorter prepayment period of three years, has no balloons and no covenants.
Cons: SBA guarantee fees are graduated based on the loan amount, which can result in larger loans having higher fees.

SBA 504 is designed to finance fixed assets including equipment, machinery and real estate.

Pros: A portion of the financing is fully fixed for 25 years, which is rare in commercial real estate. The loan proceeds can be used for construction projects as well as real estate and equipment purchases.
Cons: The processing time is longer because separate SBA approval is required. Working capital isn’t an eligible use of proceeds, which can be a significant limitation for startup loans for new facilities. A portion of the financing has a longer prepayment penalty as well, lasting 10 years.

What Are the Limitations?

While SBA loans offer numerous advantages for self-storage borrowers, they also come with specific challenges:

To be eligible, you must be a U.S. citizen or legal permanent resident. In addition, 100% of the business’ ownership must be in the hands of citizens or legal permanent residents.
SBA loans require personal guarantees from any person who has 20% or more effective ownership in the facility. There’s no way to circumvent this requirement.
If the property comes with a rental house or retail/office leases, that income can’t be included in the underwriting, as those types of real estate aren’t eligible for SBA loans. While you can still purchase a property with a house or other rental space, the self-storage income alone must be able to service the debt.

How Do I Ensure Success?

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.

Anna Taylor is head of self-storage lending at Live Oak Bank, where she’s worked since 2013. A subsidiary of Live Oak Bancshares Inc. and headquartered in Wilmington, North Carolina, the company serves small-business owners in all 50 states. Anna has 12 years of experience with Small Business Administration lending. Since 2015, she’s focused exclusively on lending to self-storage owners for acquisitions, refinances, expansions and new construction. To reach her, email [email protected].

About the Author

Anna Taylor

Loan Officer, Live Oak Bank

Anna Taylor joined Live Oak Bank in 2013. She was a dedicated credit officer for more than a year before joining the self-storage team as a loan officer. With a background in credit and financial analysis, Anna is committed to helping clients navigate the loan-application process. A graduate of the University of North Carolina at Chapel Hill, she earned a degree in advertising and completed the Minor in Entrepreneurship Program. She enjoys playing tennis and spending time with her beloved Golden Retriever, Griffin.

See more from Anna Taylor

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