By Amber Crucian
The boat and RV storage industry has shown remarkable resilience in the commercial real estate market, even during tough economic times. Whether you’re a new business owner in the toy storage industry or have already established successful facilities, financing is often critical. The financing world can be vast and overwhelming, but we can narrow it down to a few reliable loan types that can get the job done. This article will compare 7(a) and 504 Small Business Administration (SBA) loans to conventional bank loans and highlight their main differences. Various factors come into play when choosing between SBA loans and conventional loans for boat and RV storage ownership. The decision between these financing options depends on the borrower’s circumstances, financial goals, and risk tolerance.
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SBA Loans
If you’re new and searching for a product that offers several benefits for new business owners, an SBA loan can be a good choice. SBA loans offer higher leverage, typically between 85-90% of the total project cost, which means you may need to pay only 10-15% as a down payment. Such high-leverage loan products are ideal for first-time owners looking to save their liquidity.Â
There are two types of SBA loans: 7(a) and 504. When deciding which one to choose, it’s essential to consider their differences.
SBA 7(a)
SBA 7(a) loans are an excellent option for various project types, including start-up construction projects, acquisitions and expansions. Real estate loans under this program can have a term of up to 25 years; for construction projects, it can go up to 26 years. These are fully amortized loans without balloons or financial DSCR or LTV covenants. New owners can get up to 90% leverage, while current owners with a stabilized, cash-flowing facility that has been in operation for at least a year can get up to 100% financing.
SBA 7(a) loans can cover all land or building acquisition costs, hard and soft construction costs, and closing costs. In the case of construction, this loan program covers interest reserves and operating capital to bridge the gap between any operating deficit during lease-up. This lease-up coverage helps ease the burden on the owner to make payments on the loan before the business can support the debt once the facility is further into lease-up. SBA 7(a) loans can also have anywhere from 12-36 months of interest-only payments before Principal and Interest payments kick in.Â
The SBA 7(a) loan program has a “runway” of $5 million per industry, though some banks may be willing to lend more to a larger project with the SBA 7(a) program through what is called a “pari passu” loan. Prepayment penalties for SBA 7(a) real estate loans are relatively short and stair-stepped at 5% for year one, 3% for year two, and 1% for year three from the closing date. This loan program’s structure and down payment options are flexible, making it an excellent choice for those starting their first project. Additionally, the government partially backs these loans, minimizing the risk to banks lending on the project.
While the 7(a) program offers many benefits, it also has a few drawbacks. There’s no origination fee for SBA 7(a) loans, but there is an SBA Guarantee Fee. This fee goes directly to the SBA to fund the loan program and varies depending on the loan size (anywhere from 0% to 2.5% on average). Higher leverage, longer-term/amortization options and flexible use of proceeds tend to give this loan product higher interest rates than conventional or 504 products.
It’s essential to remember that this loan program has many nuances. If you plan on going the SBA 7(a) route, look for a lender with Preferred Lender (PLP) status with the SBA. Having PLP status means that your lender has experience with SBA 7(a) loans and is qualified to make credit decisions at a bank level, as opposed to sending every loan through the SBA for approval. This expedited approval process can shave off three to four weeks from the closing timeline since underwriting, credit approval, closing and loan disbursement can all happen in-house.
SBA 504
While SBA 504 is also a loan program offered by the Small Business Administration (SBA), significant differences exist between it and the more common 7(a) program. For instance, SBA 504 loans can finance larger projects, up to approximately $15 million. The loan structure typically involves a 50% bank loan from the lender, 35-40% through an SBA debenture and 10-15% equity from the customer. Due to the blended rate, the rate options for 504 loans are often more attractive than those for the 7(a) program. Additionally, SBA 504 loans may include an extended interest-only period and interest reserve to help with loan repayment during construction.Â
A few aspects to be aware of are that 504 loans cannot provide working or operating capital funding, while the 7(a) program can. The need for working capital can be an issue if you require additional operating capital during lease-up while funding a construction project. Also, the SBA debenture portion of a 504 loan has a longer prepayment penalty of 10 years. Therefore, while you may have a lower and fixed rate for the life of the SBA debenture loan, you may end up paying more in penalties if you decide to refinance down the road compared to an SBA 7(a) or conventional loan. Lastly, these loans typically involve a first mortgage fee and a bridge loan fee determined by the lending bank.
SBA 504 loans are a collaborative effort between your lender, a Certified Development Corporation(CDC) local to your project, and the SBA. The 504 program can be more complex because the customer must receive approval at the bank level and from the CDC and the SBA before closing. However, overall, a 504 loan is a great product for larger projects, especially those involving construction, and could be an excellent choice.
Conventional Loans
When it comes to Conventional Loans, it’s important to remember that each bank has its own specific structure for these loans. Conventional loans are generally more flexible regarding their structure, term and recourse, but they tend to have more strict requirements regarding covenants and deposits. These loans are typically less leveraged than SBA loans, and the average loan-to-value/loan-to-cost ratio ranges from 60-75%. Conventional loans are more suitable for individuals with industry experience, higher net worth, and strong personal liquidity.Â
Conventional bank loans enable the lender and borrower to negotiate terms that work for both parties, including prepayment penalties, origination fees, loan term/amortization, balloons and covenants. For instance, a bank may include a three-year prepayment penalty, a 1% origination fee, 36 months of interest only and a five-year balloon with some DSCR or debt yield covenants. However, the bank and customer can negotiate these terms based on the risk tolerance of both parties.Â
Conventional loans typically offer a lower interest rate than SBA loans due to the lower leverage and higher liquidity requirements typically warranted by the issuing bank.
Final Verdict
Different options are available for financing boat and RV storage ownership, such as SBA 7(a), 504 and conventional loans. Each loan type provides benefits and challenges; the best option depends on your unique needs. To summarize, 7(a) is an excellent option for those new to ownership who need more liquidity for a conventional loan. 504 loans are often suitable for larger projects. Conventional loans can fit experienced owners with strong personal liquidity. While these are general assumptions, a seasoned boat and RV storage lender can help you find the perfect fit for your needs. Whether you are acquiring a new facility, refinancing, expanding your business, or building a new one, having a good relationship with your lender can be crucial to your project’s success and your business’s long-term growth. It is critical to work with a lender who understands the loan products available to you and the intricacies of the toy storage industry.Â
Amber Crucian joined Live Oak Bank in 2019 and is currently a Lender on the Self-Storage Lending Team. Amber started in the Business Analyst Group on the Pharmacy Team, was a Team Lead for the Healthcare Team, moving to Self-Storage Lending in 2022. Amber graduated from UNC Greensboro in 2013. Amber loves hiking in the North Carolina mountains with family and is an avid reader.
