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Working Capital
Overcoming The High Cost Of Funding
By Mark E. Battersby
illustration of a male figure dressed in a suit and tie and wearing a large sack of overflowing money on his back like a backpack

oday’s high interest rates have put that all-so-necessary funding out of reach for many self-storage facility operators and developers. This situation is compounded by the reluctance of many traditional lenders to provide that all-important working capital required by every business.

Actions of the Federal Reserve have contributed to an increase in inflation and raised interest rates with no indication of substantial relief in sight. Combine those higher interest rates with leasing and purchase prices essentially doubling in the last few years and funding any business today is extremely difficult.

The Banking Community
With the well-documented reluctance of banks to provide the funds needed by small businesses, it may seem strange to suggest that every search for affordable funding should begin with the operation’s bank. Although numerous factors will impact the type of lender eventually choosen, the best option is usually to start with the bank currently used for the operation’s banking.

Even without a personal relationship with the banker, an existing bank often has a broader perspective of the operation’s debt, spending, and cash flow. While perhaps only a number in the bank’s system, the operation is already in the system. That puts the self-storage professional one step ahead in overcoming that reluctance.

Obviously, if a relationship with the operation’s current bank, as faint as it might be, isn’t sufficient to overcome the bank’s reluctance to provide the needed funds, or render advice, a new bank might be necessary. Since banks are often the source for the most economical financing, a community bank might be the answer.

Establishing relationships with community banks is often easy, with them considering the operation as a whole alongside the operation’s cash flow, credit, and collateral factors.

Needs Vs. Cost
Banks, in general, are interested in businesses with collateral and strong credit. Often, while not interested in providing long-term funding, banking services such as cash management, payroll services, merchant services, and lines of credit may be available.

Every self-storage facility should already have a line of credit to help tide them over short term. A business’ line of credit provides access to funds up to a preset limit, with the business paying interest only on the funds withdrawn. Fees for having the funds readily available are usually competitive.

However, as finding capital becomes more difficult, it’s more important than ever to determine why the self-storage operation needs capital, how fast it is needed, and what it can afford to pay for that funding.

While banks, even community banks, typically have low interest rates and offer competitive terms, financing may be hard to qualify for. Thus, an incentive such as a guarantee by the Small Business Administration (SBA) might help obtain that needed funding.


SBA loans make it easier for businesses to get needed funding. The SBA offers lenders, mostly traditional lenders, a federal loan guarantee. This makes it less risky for banks to lend and often means more favorable interest rates and terms for the borrower.

Repayment periods for SBA loans are based on what the funds will be used for. They range from seven years for working capital to 10 years for equipment purchases and 25 years for real estate purchases. There are a number of SBA loan guarantee programs available, including:

  • SBA 7(a) loans, the most popular, provide funds for many purposes and are available in amounts up to $5 million.
  • SBA 504 loans offer long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery, or other assets.
  • SBA Microloans are the smallest loan program offered and provide $50,000 or less to help businesses expand.

When traditional sources, even with guarantees, fail to provide affordable needed financing, it might be time to explore a relatively new option: online funding.

Going Online
Online lenders are enjoying a surge of popularity. Best of all, online banking eliminates the cost of brick-and-mortar branches, thereby generating cost savings to be passed on to borrowers.

Fintech, or financial technology, consists of two areas: interacting with a bank minus the human element and independent lenders working outside the traditional banks. Applying for an online business loan can be accomplished entirely online.

While online banking is best for those with bad credit with under-qualified borrowers paying extra, their fast funding and easy applications make them popular with many potential borrowers.

The ESOP Option
An effective strategy for minimizing the cost of the funds needed by the business involves selling the business. An employee stock ownership plan (ESOP) is a tax effective way to transfer ownership of a small incorporated self-storage facility or business to its employees while, at the same time, raising the funds needed for the operation’s growth.

With an ESOP, the business issues new shares of stock and sells them to the ESOP. The ESOP then borrows funds to buy the stock. The self-storage operator or developer can then use the proceeds from the stock sale to benefit their operation’s growth or expansion.

The business repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on the more easily obtained ESOP loans are tax deductible, which can reduce the number of pre-tax dollars needed to repay the principal by as much as 34 percent, depending on the operation’s tax bracket.

Unfortunately, the tax shield does not help with S corporations since they don’t pay corporate income taxes. Capital gains deferral, however, can make ESOPs attractive to these pass-through business entities.

Bootstrapping And Self-Funding
Obviously, it is wise for every self-storage operator and developer to have at least some personal funds at risk since that shows potential lenders and investors that the owner is committed to the success of the business.

The most basic, affordable funding strategy, called “bootstrapping,” means using personal or family funds to finance the business. On the downside, our tax laws make self-funding a touchy and complex situation. And, offsetting the convenience of bootstrapping often means giving up equity in the business.

What’s more, when a loan is made between related entities, or when a shareholder makes a loan to his or her incorporated business, our tax laws require a fair market rate of interest be included. If not, the IRS will step in and make adjustments to the below-market interest rate (BMIR) transaction in order to properly reflect “imputed” interest.

Borrower Be Aware

Dealing with an economical but unfamiliar lender isn’t always trouble-free. A loan agreement might, for instance, contain a provision requiring the loan to be repaid if the buyer misses several payments, fails to maintain certain debt service coverage, etc.

Some lenders want delayed payments made up in a single payment, some will modify and extend the loan with minimal paperwork with others treating it as refinancing, complete with the costs associated with refinancing.

And don’t forget loan forbearance. Every borrower should have a clear picture of when the forbearance will end and what the lender intends to do at the end of that period.

Speaking of loan terms, every borrower should generally match the term of a loan to the life of the item to be financed. If the financing is for a computer or security system, the loan shouldn’t be longer than their expected life.

On a similar note, a fixed interest rate stays the same through out the term of the loan while business loan rates often fluctuate, making them more expensive.

Avoid At All Costs

In the search for capital, the easiest options may be the most expensive:

  • Credit card debt. Business credit cards often offer more flexible repayment terms but typically have higher interest rates than traditional financing. Designed to appeal to businesses whose cash flow might be irregular, the higher cost of business card debt results because the debt is usually unsecured, making it riskier for lenders.
  • E-mail solicitations. Answering those “We Lend Money to Businesses” ads means leaving the banking sector with its various protections and borrowing from a private lender.
The Added Cost Of Taxes
After funds have been obtained at a favorable cost, it doesn’t mean that the interest is automatically tax deductible. There is something called the “tracing rule,” where interest is traced to its use to determine whether or not it is deductible. Suppose, for example, a business borrows money but only a portion is used to purchase needed equipment. The balance of the borrowed funds goes to a key employee or even the owner to purchase a personal vehicle.

Obviously, the interest on the borrowed funds used for equipment, supplies, or other business expenses are deductible. The interest on the portion of those borrowed funds distributed as a loan or bonus is not tax deductible by the borrowing self-storage facility or business.

Every self-storage professional seeking to borrow money faces many challenges, such as where funding is available and at what interest rate. What is the total cost including fees? Is the funding good for an extended period of time, or can payment be demanded early? Guidance from a professional adviser may be necessary.

Mark E. Battersby is a freelance writer based in Ardmore, Pennsylvania.