SBA Loans: Are They A Revolution In Self-Storage Financing?

SBA Loans: Are They A Revolution In Self-Storage Financing?

As of the release of the Standard Operating Procedures (SOP) 50 10 (5) (C), effective October 01, 2010, if an entity is “primarily engaged” in the provision of mini warehouse / storage services, not the leasing of real estate, it falls under the passive businesses currently eligible. In short, self-storage facilities are now eligible for small business financing from the Small Business Association (SBA).

Why consider SBA financing?

Self-storage owners have good reasons to consider using the SBA program:

Leverage: The SBA allows a business owner to leverage up to 90 percent of the total project cost.

Higher loan amounts: The Obama administration has made the SBA program very attractive, by increasing the SBA loan ceiling to $5 million.

Bundling: The SBA allows owners to bundle project costs, including working capital; furniture, fixtures and equipment; architecture, etc.

Long Term Fixed Rates: The 504 program fixes rates on a portion of the loan for 20 years.

How does the SBA work?

The SBA is a U.S. government-backed agency that guarantees between 75 to 90 percent of the loan amount issued by a commercial bank. The SBA has two programs from which to choose.


  • Two loans; a 1st up to 50 percent of the cost and a 2nd up to 40 percent of costs; totaling 85 to 90 percent of costs.
  • The bank provides the first loan with a 20 to 25 year amortization, fixed for 5 to 10 years at market rate. The prepayment is usually a step down, such as 5,4,3,2,1.
  • The CDC, or Certified Development Corporation, provides the 2nd loan. The CDC is a non-profit organization whose sole purpose is to enhance the economic viability of the local region. This loan is typically fixed for 20 years at low rates. The prepayment penalty is a 10 year declining, i.e. 10,9,8,7,6… 1.

The Pros of the SBA-504 include long-term fixed rates; assumability features; and lower cost of money for longer term. The Cons include a hefty prepayment penalty on the 2nd loan; a lot more people have to approve the loan; increased costs because the 2nd is a debenture; and there are VERY FEW banks currently wiling to make the seemingly same senior portion of the 504 loan – especially for self-storage credit.


  • 1 loan that is all funded by the local institution.
  • 25 year fully amortizing loan, based on Prime Rate + Up to 2.75 over.
  • Fully floating, and possible fixed rates.
  • 5,3,1 prepayment penalty.
  • The Pros of the SBA-7(a) include a greater likelihood of approval for self-storage facilities than the SBA-504; only one simple loan to manage; currently lower rates; and ability to get out of the loan after 3 years if things are going great. The Cons include floating rates in an environment where inflation could rise; no cap on the rate; and the requirement for additional collateral for the SBA to latch onto.
  • Succeeding through the SBA Is As Easy As 1, 2,3…
  • To succeed in applying for SBA financing you will need to be flexible, patient and cooperative with your loan originator. Here are three easy steps to ensure your success in procuring an SBA-backed loan:
  • Collaborate: Your SBA consultant will provide a screening test to make a preliminary determination of the likelihood of approval for a SBA loan. The screening test will cover finances, profiling, property and project sizing, individual cash flow underwriting and economic analysis.
  • Collecting: You will receive a very detailed checklist of financial documents which is tailored to you and your situation. From here all you need to do is put your head down and start going down the list.
  • Conceptualization: Now it is the job of the consultant to conceptualize a plan and to execute a proposal. Be prepared to roll up your sleeves and assist in making your dream a reality.
  • The SBA process is simple, but not necessarily easy. As long as you are knowledgeable and prepared, your chances of success are good.
  • Next Steps
  • If you are looking to purchase a loan for, or to refinance a self-storage facility, here are some eligibility
  • Have you made less than $5 million in the last two years and have a net worth of under $15 million?Do you have sufficient outside cash flow to support the debt service 1.2 times?
    1. Do you have a FICO score over 680?
    2. If you can answer in the affirmative to all three, then it is time to take the next steps and to get started.
    3. From “SBA Loans: Are They a Revolution in Self-Storage Financing?” by David Kotter, the Principal Founder of Integrity Capital, LLC. This article is provided courtesy of Setnor Byer Insurance & Risk with the permission of Mini-Storage Messenger Magazine.© MiniCo, Inc. All Rights Reserved. It is not intended for further reproduction/distribution without the exclusive permission of MiniCo, Inc.