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Can You Use a SBA 504 Loan for Self Storage?

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Starting or expanding a self-storage business can be a lucrative venture. Nearly everyone will need a storage unit at some point, which makes it a fairly attractive investment. 11.1 percent of all American households currently utilize self storage, contributing to this 29 billion dollar industry. So how can you get in on the action? For a start, you will likely want to review financing options. Did you know that the SBA 504 loan can be used for certain aspects of your self storage business? Read our blog to learn more. 

Understanding SBA 504 Loans

Let’s briefly review what the SBA 504 loan is. The SBA 504 loan program is a specific type of SBA loan designed to facilitate long-term financing for small businesses looking to acquire or improve real estate and other major fixed assets. It operates through Certified Development Companies (CDCs) in partnership with traditional lenders. The general structure is as follows:

  • You provide 10 percent in the form of a down payment
  • A CDC facilitates your loan through the SBA, up to 40 percent of the needed/approved amount
  • A traditional lender, such as a bank, supplies the remaining 50 percent 

In most cases, you will be eligible for up to $5 million. However, qualifying projects geared toward improving energy-efficiency may be approved for more than one SBA 504 loan at up to $5.5 million each. Repayment terms vary depending on the project. For example, most real estate projects are between 20 and 25 years, while equipment loans must usually be repaid in 10. 

SBA 504 For Self Storage

Again, the SBA 504 loan is for long-term fixed assets. So long as your project falls under this category, you can use the 504 loan to finance it. This includes:

Acquiring Real Estate

One primary use of the SBA 504 loan is the acquisition of real estate. In the case of self storage, this would include the land, office space, and the units themselves. 

Construction and Renovation

SBA 504 loans can cover construction costs and renovations. Entrepreneurs planning to build a brand new self-storage facility or expand an existing one can use the loan to fund these projects. You can also use the loan to renovate units or entire facilities in need of upgrades and repairs.  

Equipment and Materials Purchase

SBA 504 loans can be employed to purchase essential equipment and materials necessary for self-storage operations. This may include security systems, climate control units, shelving, and office equipment.

Land Improvements

Funds from the SBA 504 loan can be allocated to land improvements, such as landscaping, better parking, paving, and fencing. These enhancements contribute to the overall functionality and aesthetics of the self-storage property. 

Is Self Storage a Good Investment?

While certain types of commercial property are inherently risky, self storage is generally considered a solid investment. This is for a couple reasons:

Consistent demand: self storage is always in demand. While business can fluctuate with the seasons, it is much less prone to market dips than other types of commercial real estate. Steady customers also implies lower marketing costs, since you won’t have to work as hard to maintain occupancy. 

Low overhead costs: once the business gets going, it costs relatively little to maintain a self storage facility. Routine upkeep and utilities may set you back, but you won’t have nearly as many surprise repairs as you would with a tenant-occupied property. Your employee costs will also be low, since much of the physical work needed is done by the customers themselves. 

What Is Excluded from SBA 504 Financing with Self Storage?

The SBA 504 loan is for fixed assets only. This means it cannot be used for working capital, which is the difference between current assets and liabilities. Current assets include things like accounts receivable and inventory, while liabilities might include accounts payable and employee wages. 

You are also not eligible to use the SBA loan for residential rental real estate, such as apartment complexes. 

Colorado SBA 504 Loans

If you are planning on purchasing a self storage unit (or building one from the ground up), your first step should be to consult with a Certified Development Company. In Colorado, CEDCO.org has helped local businesses grow and thrive for over thirty years. We work with our clients every step of the way to make the process as stress-free and transparent as possible. Call or go online today to schedule a free consultation and start your dream business. 

self storage unit open to reveal stacks of boxes
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504 Loan,Small Business
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