By Esperanza Daniel

etermining optimal timing and financial circumstances for expanding a self-storage operation can easily become overwhelming.

Completing a transaction with the wrong terms or at the wrong point in the life cycle of a business can result in an unwanted setback. Add in economic uncertainty and steady but higher-than-desirable interest rates, and hesitancy or complacency could lead to missed growth opportunities, including mergers or acquisitions of struggling self-storage competitors.

Assembling a trusted team of financial advisors who truly understand the nuances of the industry can result in creative lending options combining both commercial real estate and operating capital needs. Fears over logistics should not stop the pursuit of growth, and the right team members can help identify options not even being considered.

If expansion of a self-storage business is a priority, a regional or community bank attuned to the traits and trends of the local market can support strategies tailored to the target demographic, which is often contained in a very tight geographic area around the business.

Self-storage businesses looking at mergers and/or acquisitions often have physical requirements, which can include disposition of land, construction and/or renovations of facilities, and general operational needs. These complexities call for a lender who can help in collateralizing a deal and combining lending tools to address the big picture. While these can be seen as competing needs, the right lending partners can provide flexible options, expert guidance, and agile, local decision-making.

The ups and downs of a closely held, owner-operated business create variables that must be addressed in pursuing growth. Timing matters when exploring expansion capital, a new capital structure, or a more efficient solution to even out cash flow cycles.

Conversations related to these logistical considerations need to happen before growth becomes a priority or opportunities arise. Proactive planning with financial stakeholders can set your business up for efficient execution of a deal when presented with desirable opportunities that might otherwise be missed.

Unlike a competitively priced home, which may sell within a matter of days before buyers can fully assess their options, studies show that it takes an average of eight to 10 months to sell a business. In recent years, this time frame has been increasing annually, according to the California Association of Business Brokers. This is even the case for successful, cash-flowing businesses, thus posing an opportunity for those looking to seize opportunities to grow while balancing careful decision-making.

According to U.S. Census Bureau data, the self-storage industry continues to demonstrate unique resilience to negative economic circumstances, including the financial impact of the COVID-19 pandemic. As with any category, however, there are operations that have not been properly managed but still have potential under the right ownership, even in an increasingly saturated market.

The recent and still current spike in inflation resulted in price hikes across most industries, and self-storage has not been immune. Business owners continue to endure the impact with a need to mitigate and offset costs.

While inflation rates are dropping slightly, higher prices are expected to last for the foreseeable future. Conversely, higher interest rates set to slow the effects are expected to come down, but no one can say exactly when.

Keeping this outlook in mind, there are many ways self-storage businesses can navigate inflation and even take advantage of growth opportunities. Strategic responses to inflation can potentially drive higher revenues, even with higher interest rates on loans, which are only one piece of the lending puzzle.

Evaluating “loan readiness” may even shed light on gaps that need to be addressed in currently successful business strategies. Identifying and addressing red flags or shortcomings has benefits beyond increasing chances of a positive outcome in a lending application, particularly when they involve commercial real estate and operational lines of credit. Examining readiness can shed light on a variety of ways to strengthen an operation, such as improving processes and efficiencies and developing a trusted relationship with a communicative, collaborative bank.

The most important takeaway in determining loan readiness: Business loan decisions are both objective and subjective.

Basic financial criteria must be met, but overall impressions, work style, and the ability for the bank and business owner to develop a deeper, trust-based relationship matter. With a better understanding and preparation, self-storage businesses can address the full range of qualifications to maximize chances of getting that coveted “yes” on a loan application needed to take advantage of immediate opportunities.

While some criteria weigh heavier than others, ensuring that crucial aspects of a financial picture are in good shape will help create a better position when it is time for a loan decision to be made. Common loan stumbling blocks to avoid include:

NO BUDGET
A surprising number of businesses do not have a set budget, meaning the bank can’t forecast growth. It’s also a sign that it may be too early in the life cycle for a bank to take the risk.

MINIMAL UNDERSTANDING OF YOUR NUMBERS
If there is difficulty explaining critical details of finances, or relatively simple questions are hard to answer, it leaves the business owner and the bank vulnerable should financial challenges arise.

INTEREST RATE IS A PRIMARY CONCERN
Everyone wants the lowest possible interest rate, but if businesses are talking to multiple banks and pitting them against each other, a lender may see this as “rate shopping” rather than seeking a business partnership. Switching banks frequently also leads to questions about commitment.

INSTABILITY, VARIABILITY
If balance sheets show frequent highs and lows, especially on occupancy rates, providing background on these issues with the prospective banker can help mitigate concerns.

TURNOVER RATIOS LENGTHENING
Delays in paying vendors or collecting payments can worry a banker. There are many good explanations that will help overcome this hurdle and ensure the lender understands the nuances.

NO SKIN IN THE GAME
If an entrepreneur or business owner hasn’t put their money where their mouth is, why should the bank? History of investment or plans to invest can play a role in an evaluation.

GROWTH AND EXPANSION THAT IS TOO FAST
This may seem counterintuitive, but rapid expansion can mean management may not be able to sustain the growth or may not have grown infrastructure and/or capital base to keep up.

OVERALL CASH FLOW
Providing a banker with global cash flow information, including relevant personal and affiliate financial and debt records, can help banks calculate total cash available to pay for potential loans. While focused on capital for financing, overall marginal or negative cash flow must be addressed. Alternatively, many businesses have felt a need to carry excessive amounts of cash without realizing that reducing that number and increasing debt can be a positive situation.

GROWTH THROUGH OTHER MEANS
The needs of storage customers continue to evolve, and mergers and acquisitions are only one way to grow an operation.

When assessing relevant opportunities, financial advisors and the business owner should consider rising costs, including rent, utilities, insurance, and repairs. Other associated concerns related to increased spending include technological advancements and even customer service needs in an increasingly digital environment with unique expectations.

Keeping pace with industry standards like electronic gate systems and online rental options continue to become increasingly relevant for staying competitive in the self-storage market, especially to provide adequate security that protects customers’ possessions. This also includes increasing needs to attract and retain quality employees to ensure prompt responses that have a direct impact on customer satisfaction and retention.

Maintaining competitiveness can occasionally mean pursuing an opportunity to acquire property and build modern, innovative facilities at the cutting edge of the self-storage industry.

While these typically multimillion-dollar projects can take time, the advantages can include multistory facilities with climate-controlled units and niche spaces for car/recreational vehicle storage to attract increasingly affluent customers. Additionally, a lack of self-storage facilities or an abundance in a specific geographical area can make these amenities a differentiator that captures market share and enables additional merger and acquisition (M&A) activity down the line.

Analyzing risk-reward scenarios with trusted financial advisors who both understand the goals of your business and the target market and demographic allows for informed decision-making based on viable lending models that result in desired outcomes.

Don’t wait to start planning for growth opportunities. Conversations should be had in the short term to ensure long-term success in construction projects or M&A transactions.

Financing terms for self-storage businesses have become increasingly challenging due to circumstances not unique to the industry. However, successfully navigating the interplay of the general economic environment and needs specific to self-storage businesses often hinges on the partnership between a capable business owner, the appropriate contractor partners, and an experienced lending partner who possesses comprehensive market knowledge and understanding.