The Small Business Association (SBA) offers lending programs that are often mistakenly thought of by self-storage operators as cumbersome, last-resort loan options. Much of this misperception is generated by experiences with banks that don’t specialize in SBA lending, aren’t preferred SBA lenders, or lack lending expertise and experience in the storage industry. Let’s take a closer look at SBA loans, including some of the advantages they provide and tips for securing financing.
Advantages of SBA Loans
An SBA loan can provide advantages for the self-storage borrower. In an SBA program, the loan is made by a bank, but the debt is partially guaranteed by the SBA. This allows the bank to provide credit for a borrower who may otherwise have difficulty obtaining a loan with favorable terms. SBA loans tend to be borrower-friendly as well as flexible to equity and collateral requirements. They also have no loan covenants, and longer terms with no balloons.
For example, a conventional loan may have a 10- or 20-year amortization with a balloon in three to five years, while an SBA loan will have an amortization and term of 25 years. The SBA acts like an insurance company, allowing the bank to extend its conventional credit reach.
Determining Creditworthiness
When banks review and analyze an SBA loan request, they’ll generally ask for the following items. This information will help the lender understand the owner and business and determine creditworthiness.
- Three years of tax returns for the business and the borrower
- A year-to-date financial statement for the business
- A personal financial statement for the borrower
- A business plan complete with three years of financial projections
A lender’s analysis of a borrower generally addresses the five Cs: capacity (cash flow), character, collateral, condition and credit. Let’s take a look at each.
Capacity (cash flow). SBA loans are largely qualified based on the cash flow of a business rather than its assets. In its simplest definition, cash flow is the difference between the revenue and expenses a business incurs in any given period. If there’s more cash coming in than going out, the cash flow is positive. If expenses are higher than revenue, the cash flow is negative.
Net operating income (NOI) and cash flow are often thought of as the same; however, NOI frequently includes non-cash expenses such as amortization and depreciation. To calculate your net cash flow, take the net income per your profit-and-loss statement and add any amortization and depreciation.
A business should have sufficient cash flow to comfortably support its expenses and debts while providing salaries for the principals. In self-storage, owners will often have other sources of income, eliminating the need for a principal salary.
Character. The lender needs to know the borrower and guarantors are honest and have integrity. Additionally, it needs to be confident that the applicant has the background, education, experience and industry knowledge to successfully run the business.
Collateral. A lender will consider the value of the business and the personal assets of the guarantors as a secondary source of repayment in case of default. Collateral is an important consideration for a conventional loan, but not as significant with an SBA loan.
Condition. The lender will need to understand the condition of the business, industry and economy. Is this an acquisition, expansion, new build or refinance? Are current conditions likely to change, deteriorate or improve?
Credit. As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors. Good personal credit is a must. Any problems must be thoroughly explained.
Streamlining the Process
SBA lending requires numerous documents and can be tedious for a borrower, especially when the lender isn’t a specialist. When considering an SBA loan, it’s helpful to use a lender that’s part of SBA’s Preferred Lender Program (PLP). A PLP lender will know how to determine eligibility and properly structure the loan. PLP status also allows the bank to approve the loan without waiting for SBA approval, as the bank acts on behalf of the administration.
An SBA loan can be a viable option for many small-business owners. Do your research, find a bank that knows your industry and is a designated preferred lender, and you’ll be on your way to securing your dream.
Terry Campbell is the domain expert for the self-storage lending division of Live Oak Bank, which offers up to 100 percent financing for facility acquisitions, construction, expansion, refinancing or renovation. Terry has more than 20 years of self-storage industry experience. For more information, call 877.890.5867; e-mail [email protected]; visit www.liveoakbank.com.
