Self-Storage Financing: How It Works - Fora Financial Blog
Self-Storage Financing: How It Works
March 14, 2022

Self-Storage Financing: How It Works

With an annual industry revenue of $39.5 billion, self-storage is big business. Securing a slice of that revenue, though, requires capital investment.

Whether you’re looking to build, acquire, expand, or renovate self-storage, you’ll need financing.

Fortunately, self-storage is and has been an industry with a long history of steady growth and strong fundamentals. According to the NY Times, the self-storage industry has averaged 3.5 percent annual returns for over 30 years.

Thanks to these positive numbers, many lenders are interested in financing self-storage projects. However, no two business loan lenders are the same. So understanding your storage loan options and how self-storage financing works is key to successfully financing your project.

To that end, we’ll summarize each of your financing options and how they’re typically structured.

Self-Storage Loan Options

You can obtain self-storage business loans from SBA lenders, credit unions and banks, or alternative lenders. In the sections below, you’ll learn about the financing offered by these three categories of lenders.

SBA Loans

Self-storage financing with the SBA is available through their SBA 7(a) and 504 loan programs. SBA 7(a) and SBA 504 loans for self-storage financing are structured the same as they are for any other approved purpose.

The loan itself is made by a financial institution and the SBA partially guarantees the loan. This partial guarantee allows lenders to offer SBA loans to borrowers who wouldn’t otherwise qualify. However, because SBA loans have such affordable rates, the application process is highly competitive.

You can use an SBA 7(a) or 504 loan to purchase property, expand or renovate an existing self storage unit, or refinance existing debt.

SBA 7(a) and 504 loans provide a maximum of $5 million in self-storage financing over a term of between 10 and 25 years. For both kinds of loans, you’ll generally need a down payment of around 10 percent of your loan amount. It will take an SBA loan at least a few months to be funded from the time you apply.

Credit Union and/or Bank Loans

You can finance self-storage projects through a credit union or bank with either a line of credit, a traditional loan, or a construction loan.

However, it’s worth noting that many lines of credit have maximum amounts between $100,000 to $250,000. Depending on your self-storage project, you may need a larger amount to finance your project.

Also, a business line of credit is generally designed for shorter-term financing needs. Most lines of credit have terms of seven or fewer years. That means you’ll need to pay off your line of credit quickly, which may not be feasible for some borrowers. Of course, if your self-storage project is small, this will be less of an issue.

Business loans from a credit union or bank are much better suited for larger self-storage financing. According to Federal Reserve data, the average small business loan amount is $663,000 and ranges from $13,000 to $1.2 million. Typical repayment terms for business loans range from three to 25 years. However, repayment terms of 10 years or less are most common.

Self-storage construction loans are designed to finance the construction of a self-storage facility. Typically, you’ll need a down payment of around 25 percent to qualify and the loan term will last as long as construction does. Around the time that the construction project ends, you’ll owe a balloon payment for the balance.

Due to the balloon payment, most borrowers have permanent financing lined up before their construction loan term ends.

Alternative Loans

Like banks and credit unions, alternative lenders also offer business loans or lines of credit for self-storage projects.

Alternative lenders include any company or individual that is not a traditional financial institution, like a bank or credit union. Typically, you’ll work remotely with an alternative lender via phone and email.

The main advantages of alternative lenders for self-storage financing are:

  • Shorter application processes
  • Lower minimum qualifications
  • Faster funding

Another advantage of alternative lenders is the wide range of financing options they offer. With an alternative lender, you’re not restricted to a line of credit or a term loan. You can explore financing options suitable for self-storage such as:

  • Accounts receivable financing
  • Hard money loans
  • Working capital loans
  • Bridge loans

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Choosing and Putting Self-Storage Financing to Use

The business of self-storage is simple, but that doesn’t mean it’s easy.

Ultimately, there are two paths to sustainable growth: raise rents, increase square footage, or both.

To raise rents, you need to provide value that justifies those rents. Upgrades like climate control, improved security, and enhanced curb appeal can all help justify higher rent. Similarly, to increase square footage, you need to build; all of this requires financing.

Which financing you choose will depend on your financial qualifications and your planned expenditures. For more information about any of the loan options mentioned above, here are several educational posts from our blog:

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].