How do self-storage business loans work?
Business loans are often structured as unsecured installment loans and may come with variable or fixed interest rates. In some cases, lenders do require the loan to be guaranteed with the use of collateral, making it a secured installment loan. Installment loans allow the borrower to receive a lump sum of cash upfront that is then repaid over time in fixed monthly payments over a set loan term. For example, a business loan may award the borrower with $10,000 in cash that is then repaid over 7 years with interest.
Types of self-storage business loans
There are plenty of options when it comes to business loans. Some may be better than others, but in general, what’s best usually comes down to your situation. Let’s explore various types of business loans so that you can make an educated decision.
Business loans via online lenders: There has been a large increase in the number of online lenders that are offering financing such as small business loans. Using an online lender often leads to a smoother application process and faster access to cash. Loan decisions are relatively quick and application requirements are often more lenient than other types of financial institutions such as banks. An added benefit, the ability to compare several loan offers all in one place.
HELOC or Home Equity Loan: Another option for business owners is to use equity-based financing to cover their business expenses. If you have equity in your own personal property, you may want to consider taking out a HELOC or home equity loan, although this option does come with its own unique risks. If you fail to repay your balance, you run the risk of losing your home. For new businesses with limited history, this may be a viable option.
SBA 7(a): The SBA 7(a) loan program has a maximum loan amount of $5 million and can be used for a variety of business needs including real estate, short- and long-term working capital, business equipment or inventory, and the refinancing of business debt. SBA loans are backed by the government and can be obtained through authorized lenders.
SBA 504 loans: This loan program provides long-term, fixed rate financing for major fixed assets such as equipment or real estate. Just like the 7(a) loan, applicants can borrow up to $5 million dollars for qualified business expenses. SBA loans are backed by the government and can be obtained through authorized lenders.
USDA: The USDA business loan program provides financing to small businesses in rural areas as a way to help stimulate economic growth and development as well as provide jobs.
Pros and cons of self-storage business financing
Financing can certainly help grow your business. If it’s not managed properly though, it could also seriously hurt your business. Compare the pros and cons and make sure you thoroughly understand financing before taking out a loan.
Small business loans allow entrepreneurs and business owners a way to get the funds they need for their business ideas without the need to have all of the cash up front. With fairly low interest rates and relatively low fees, small business loans can be a great way to spread out the costs of your business start-up or operational costs over time. Having access to financing such as a small business loan can be the difference between having and not having a business, or the difference between staying in business and having to shut down due to lack of funds. To summarize, the pros of self-storage business financing include:
- Funds to grow your self-storage business
- Fixed monthly payments
- Influx of cash
- Competitive interest rates
- Improve cash flow
Business financing can be a hassle to obtain, and some lenders may require a hefty down payment or collateral in order to approve you for the loan. It can be very risky to take out a small business loan if you are required to provide collateral. Business loans often come with the need to submit a great deal of paperwork including financial statements and a business plan. After all of this documentation is submitted and the loan requirements have been met, approval can take as long as 1-3 months. On the other hand, using credit cards or personal loans for your business financing can be a much smoother option to obtain funds quickly without the red tape. To summarize, the cons of self-storage business financing include:
- Lengthy approval process
- Interest and other fees
- Risk of default
- May be required to provide collateral
How much does it cost to start a self-storage business facility?
To start a self-storage business facility, business owners can expect to pay anywhere from $1 - 10 million for the development or purchase of the self-storage building itself. In addition, there are other start-up costs such as staffing, marketing, and licensing to consider. Although starting a storage facility can be a very expensive business endeavor, it can also be a very good real estate and business investment.
Is self-storage a good investment when compared to other forms of real estate?
Starting a self-storage business is a unique type of opportunity for entrepreneurs to undertake.
The self-storage industry is largely recession-proof due to the prevalence of homeowners who need storage solutions and the fact that people continue to relocate and utilize storage facilities even in a recession. In fact, storage facilities may even see growth during a recession as homeowners lose jobs or need to downsize. For example, occupancy rates grew year-over-year from 2019 to 2021 even during the COVID-19 pandemic.
The industry has seen strong growth in recent years and is a fairly stable business endeavor. Although the self-storage industry has its risks, it has one of the lowest break-even occupancies in commercial real estate, a fairly quick eviction process for non-paying tenants, and the ability to auction off storage unit contents to cover any unpaid rent. Lastly, self-storage facilities have a higher profit margin than many other business opportunities.
All of these factors make self-storage units a good investment compared to other forms of real estate. Best of all, if you buy the land your business is on, you can sell it or turn it into another business if you ever feel the desire to.
Is it better to buy or build your own self storage facility?
For many new business owners, one of the most important decisions to be made is whether to buy and take over an existing business or start your own from scratch. The self-storage industry is no exception.
To build your own self storage facility, you can expect to pay anywhere between $25 - $70 per square foot, depending on the materials and your geographical location, and you will need to purchase at least 2-5 acres of land. This can easily add up to a few million dollars for the construction and development of a large self-storage facility with climate control.
On the other hand, you could potentially save money by buying a pre-existing self-storage facility, although the hunt for such a property could take years. If you do find one for sale, you will have to look at current operating costs and revenue as well as the demand for self-storage in the area. You’ll need to consider the potential for future profits as well. Lastly, you will most likely need to pay a down payment of at least 10-25% to close your real estate deal. The cost of buying your own self storage facility will also vary widely depending on your geographical location and whether you are in a rural or urban area.
What kind of interest rate can I expect to pay for self-storage business loan financing?
The interest rate you will pay on your self-storage loan can depend on a variety of factors including your personal credit score, the type of loan you are applying for, and the lender you are using. For example, loans backed by the Small Business Administration tend to have lower rates than other loan programs.
However, your credit score will most likely be the greatest determining factor of your business loan interest rate. For borrowers with Prime credit scores, you can expect to pay around 2.5% to 7% APR.
You will also need to keep in mind the amount of any loan fees that your lender charges. In order to find the best deal, remember to factor in these fees as well as the interest rate to find your total cost.
How do I qualify for a self-storage business loan?
Each lender and loan type has its own unique qualifications. However, there are a few general requirements to keep in mind. To qualify for a self-storage business loan or any other type of small business loan, you will likely need to have a written business plan, solid financials, a decent credit score, and be prepared to submit any requested information about your business and your personal finances.
You may also need to provide collateral to secure the loan such as business equipment, real estate, or inventory. Collateral gives lenders a way to recover their money through your assets if you fail to repay.
SBA-backed business loans tend to have more lenient application requirements and offer more competitive interest rates. In addition, they are less likely to require collateral and typically require a lower down payment than other loan options.
How to finance your self-storage business
There are a number of different ways you can finance your new self-storage business. Aside from using personal funds or raising capital from friends, family or investors, you can apply for different types of financing to cover your start-up or operational costs. Options include small business loans, SBA-backed loans, personal loans, home equity loans and lines of credit, and personal or business credit cards.
To apply for financing, you’ll need to compare the pros and cons of the different options and apply online or in person via a local bank, credit union, or online lender. You may need to show proof of your ability to repay the loan such as a business plan or financial projections. The lender will check your credit score and may even require a down payment or collateral to help guarantee the repayment of the loan.
Getting prequalified can help you determine what kind of deal you can expect to receive on a business or personal loan. The lower your interest rate, the more money you can put back into your business. To expedite the process and access some of the best rates on the market, start by checking business loan offers at PrimeRates.
Opening up your own self storage facility can be a very lucrative business opportunity, especially with the right small business financing to help you cover the initial start-up costs.
Today, most lenders offer the ability to submit your loan application via their website. It is relatively quick and easy to apply for a small business loan online. Before applying, gather documentation about your business such as a business plan and make sure that your credit is in the best possible shape.
Be sure to thoroughly compare the rates and loan terms from multiple financial institutions before you make your final selection. It is especially important for business owners to shop around for the best deal so they can get the most benefit from their loan proceeds and put more money back into their business.
At PrimeRates, you can check offers with no impact to your credit score. The ability to check offers within seconds can save you time and money too. With access to top lenders all in one place, you can put your self-storage business on the fast track to success.
Need financing for a self-storage business? Unlock offers today with no impact to your credit score.