Starting a self-storage business can be a great investment, but it can also require a significant amount of capital. There are several options available for financing a self-storage business, including traditional bank loans, small business loans, and merchant cash advances. In this article, we will explore some of the most common options for financing a self-storage business, so that you can make an informed decision about which one is right for you and your given situation.

As interest rates rise and the prospect of a market correction looms, many lenders are tightening standards across the board. That means borrowers in the self-storage space may have to consider an array of different lending options, including new alternative approaches to finance.

If you are seeking funding for your self-storage business, consider the following sources of finance:

  • Merchant cash advances for self-storage
  • Lines of credit for self-storage
  • SBA 504 loans for self-storage
  • SBA 7(A) loans for self-storage
  • Conventional loans for self-storage
  • Bridge loans for self-storage
  • Construction loans for self-storage

Merchant cash advances for self-storage

Merchant cash advances provide easy to access funding that can be used to help run and grow your business. Cash advances are not loans and don't charge interest. Rather, you agree to sell a portion of your future sales in exchange for financing now, with just a simple, fixed fee.

Additionally, because your payments are tied to a percentage of your sales, a cash advance is more flexible than traditional financing. If your sales slow down, the amount of your payment goes down as well. If your sales go up, you'll pay a little bit more. You can use a cash advance to pay for any business expenses you have. There are no sign-up, late, or annual fees.

Lines of credit for self-storage

A business line of credit from a lender may also be used to help pay short-term expenses for a self-storage business. You use a line of credit only when you need it and pay interest on any amount that you borrow. In that regard, it’s similar to a credit card.

SBA 504 loans for self-storage

One of the best financing options for self-storage owners are SBA 504 loans. They are an especially good option for operators that aren’t able to qualify for conventional financing.

The 504 loan provides long-term, fixed-rate financing of up to $5 million for buying, building or rehabbing a self-storage facility. SBA loans are issued by community development corporations (CDCs). CDCs work with banks and credit unions to fund loans.

504 funds can be used to buy existing buildings or land, build new facilities, or to improve and modernize existing facilities. Funds cannot be used for working capital or repaying debt. Repayment terms are typically 10 or 20 years.

A 504 loan consists of a conventional first mortgage, typically for 50% of the project cost, from a third-party lender. The SBA-backed portion of the 504 loan will be a second mortgage, accounting for up to 40% of the financing. The borrower typically is expected to put the remaining 10% down.

SBA 7(a) loans for self-storage

Another financing option provided by the SBA is the 7(a) loan program. These loans provide financing assistance to small businesses and can be used for working capital. 7(a) loans have a maximum term of 25 years.

Loan sizes vary, with a standard loan offering up to $5 million, while a 7(a) small loan provides up to $350,000. Interest rates are pegged to the Federal Reserve prime rate. Currently they range between 9.25% and 11.75% depending on the amount borrowed and how quickly the loan is paid off.

Proceeds from a 7(a) loan can be used for short- and long-term working capital, refinancing business debt, purchasing assets, buying property, construction or completing renovations.

Conventional loans for self-storage

A common way to finance a self-storage business is through a traditional bank loan. This option allows you to borrow a large sum of money from a bank and pay it back over time, with interest. The benefit of a bank loan is that you can often secure a relatively low interest rate.

However, the downside is that banks can be strict about their lending criteria, and it can be difficult to qualify for a loan if you don't have a strong credit history or collateral to offer. Additionally, the process of applying for a bank loan can be time-consuming and frustrating for many entrepreneurs.

Bridge loans for self-storage

Bridge loans provide a temporary solution for self-storage operators looking to obtain funding for projects quickly and are ideal for operators that are upgrading or expanding a facility. Bridge loans feature short repayment periods lasting from six months to four years. They carry higher interest rates than other loans.

Borrowers need to line up long-term permanent financing to pay off their bridge loan when the term expires.

Construction loans for self-storage

Construction loans for building new self-storage facilities can require a down payment of up to 25% of the projected cost. The borrower pays smaller monthly payments over the course of the loan term with a balloon payment due at the end.

Funding your self-storage business

Whether you are seeking funds for operating expenses, enhancing your facility, or expanding your business, choosing the right loan program is extremely important for the long-term health of your self-storage operation.

While the changing market may pose challenges for borrowers, remember that there may be flexible options available designed to suit your specific business needs. Consider the multiple lending scenarios available to you and weigh the pros and cons of each. Then you can move forward with confidence.