Self-storage Financing: What It Is & How It Works
This article is part of a larger series on Business Financing.
As a small business owner, you can use self-storage financing to purchase, build, or conduct improvements to self-storage units. Common sources for self-storage financing include loans from traditional banks, online lenders, loan brokers, hard money loans, and Small Business Administration (SBA) loans through the 7(a) and 504 loan programs.
Getting self-storage financing usually involves an evaluation of your credit and business finances. It may also include a review of the condition and value of the storage unit and facility to determine how much you can borrow.
If you’re interested in getting this type of loan, we recommend checking out Lendio. It is a loan broker with over 75 lenders in its network, and you can get up to $5 million in funding with loan terms between 10 and 30 years.
How Self-storage Financing Works
Self-storage loans can be used for multiple business purposes. You can use the funds to acquire an existing unit or build one from the ground up as new construction. They can also be used to perform certain improvements, such as renovations or an expansion. Below, we go into further detail as to how a self-storage loan works depending on how you intend on using the funds.
If you’re looking to acquire an existing self-storage facility, you’ll want to look into a loan for a purchase or acquisition. This business need often comes up as a result of analysis from an investment company or real estate investment trust (REIT) that believes it can yield a strong return on investment over the long run.
A new construction self-storage loan is used for instances where no existing storage facilities exist. Getting a self-storage loan for this purpose can be more difficult since there is no prior data for how profitable the facility will be. However, if this is done in an area with comparable facilities, then it can be more feasible, as data from those properties can be used to determine the likelihood of success for the new storage facility.
You can improve your approval odds by conducting your own due diligence with a market study. This may include a review of occupancy rates, data on the population and growth rate, and historical trends for revenue and expenses.
When creating your budget and projections for income and expenses, consider the following:
- Working capital reserves to cover unexpected expenses
- Expected timeline to reach stable occupancy levels
- Time until self-storage units can be rented
- Operating expenses during the lease-up phase
- Loan fees and monthly payments
- Funds required for a down payment
- Daily operating expenses, such as rent, salaries, and employee benefits
Self-storage units needing maintenance can be funded under this loan purpose category. Renovations can be an easy item to overlook when maintaining a property but are an important part of ensuring the safety and security of your customer’s belongings. They can also help attract and keep customers by improving its curb appeal.
Two common types of renovations done for self-storage units are:
- Replacement of rolling doors: The constant opening and closing of a storage unit’s doors can cause it to wear down and eventually fail, which can result in safety and security issues. This is often one of the largest expenses associated with maintaining a self-storage facility.
- Reconfiguration of storage units: One of the most common items to change here is the size of individual storage units, which can often come as the result of changes in customer demand.
If you want to add self-storage units to your facility, an expansion loan may be what you need. In some cases, this may also be considered a construction loan, as it shares many similarities with regard to building units from the ground up. A self-storage loan for expansion is typically easier to get than a new construction loan because of the pre-existing data to show how the current facility has performed in the past, giving more assurances as to projected cash flows in the future.
Rates, Terms & Qualifications for Self-storage Financing
Rates, terms, and qualification requirements for a self-storage loan will vary depending on the type of loan you get and the lender you choose. The loan type best suited for you will depend on the strength of your business finances and credit, as well as the details of your self-storage project.
Although rates and requirements vary among lenders, we’ve listed typical figures you’ll see for several common types of loans you can use for self-storage financing.
Conventional Bank Loan | SBA 7(a) Loan for Commercial Real Estate (CRE) | SBA 504 Loan | Commercial Bridge Loan | Hard Money Loan | |
|---|---|---|---|---|---|
Typical Loan Amount | $15 million-plus | $5 million | $5.5 million | $30 million-plus | Up to $50 million-plus |
Typical Repayment Term | 25 years | 25 years | 25 years | 1 to 3 years | 1 to 3 years |
Typical Interest Rate | 8% to 10% | 10% to 17% | 6% to 6.5% | 7% to 15% | 7% to 11% |
Down Payment | 20% | 10% | 10% | 10% to 25% | 10% to 25% |
Funding Speed | 30 to 90 days | 45 to 90 days | 60 to 90 days | 10 to 30 days | 10 to 14 days |
Credit Score | 680 | 680 | 680 | Varies | 620 |
Debt Service Coverage Ratio (DSCR) | 1.25x | 1.25x | 1.25x | 1.00 to 1.40x | Varies |
Conventional Bank Loan
A conventional bank loan can offer large loan amounts with competitive rates and terms. A potential downside is that qualification requirements tend to be strict, with less room for flexibility in the event you do not meet the minimum eligibility criteria.
However, business owners with an established relationship with a bank can sometimes go through a streamlined process, as the bank would already have access to much of the business owner’s financial information and cash flow history.
You can consider a bank such as U.S. Bank for self-storage financing. It offers a wide variety of loans, including CRE, SBA 7(a), and SBA 504 loans with up to $12.375 million or more in funding.
SBA 7(a) Loan
An SBA 7(a) loan is the most common type of loan offered through the SBA. SBA loans are guaranteed by the government but issued through individual banks and lenders. To be eligible, you must meet general requirements for all SBA loans, criteria specific to the 7(a) program, and any lender-specific items.
If you’re looking for an SBA 7(a) lender, you can consider Clarify Capital, a loan broker with over 75 lenders in its network. A loan specialist will work with you to match you with the lender best suited for your qualifications and needs.
SBA 504 Loan
SBA 504 loans are designed to provide funding on major fixed assets that will subsequently promote job creation and business growth. Funds from an SBA 504 loan can be used for the purchase or construction of existing land or buildings, as well as the improvement of existing business facilities. All of these allowable uses are consistent with the most common uses of self-storage financing.
For help in getting this type of loan, you can check out Lendio. It is a loan broker with a network of over 75 lenders and can offer 504 loans with interest rates below 5%.
Commercial Bridge Loan
Commonly used for financing real estate needing repairs, a commercial bridge loan is a short-term loan that can fund any necessary repairs. Once completed and there are no more health or safety hazards present, a bridge loan is typically paid off by refinancing to a more permanent loan.
Bloomfield Capital is one provider we recommend for this type of loan. It offers competitive rates, large funding amounts, along with flexible qualification requirements.
Hard Money Loan
Hard money loans are often considered a last resort for financing real estate. This can happen if you are unable to get approved elsewhere for funding or are trying to finance a property needing repairs. A hard money loan can offer fast funding speeds, so it can also be useful for fix-and-flip investors looking to acquire property on a short timeline.
We recommend Kiavi for its fast funding speeds and competitive rates. You can get up to $1.5 million in funding in as little as 10 days. Check out its website to learn more.
How To Get Self-storage Loans
The steps involved with getting a self-storage loan will vary slightly depending on the specific loan type and lender you choose:
- If you’re getting an SBA loan, you can see our instructions on how to get an SBA loan.
- For other types of loans, check out our guide on how to get a small business loan.
You can get self-storage loans from many different types of lenders. Some examples can include banks, credit unions, loan brokers, and online lenders. If you’re unsure where to start, you can see our list of the best self-storage loans.
Bottom Line
Self-storage financing can be used for a wide range of business purposes. This can include the acquiring an existing facility, constructing new units from the ground up, or conducting improvements or repairs. Different types of loans can be used for self-storage financing, so you should consider which one is best suited for your needs. You should also shop multiple lenders so that you can get the best loan rates and terms.
