Summary
Per the SBA's Standard Operating Procedures (SOP), an independent business valuation is required if the amount being financed via a 7(a), 504, seller, or other financing product, minus the appraised value of real estate and/or equipment is greater than $250,000.
What to Know about SBA business valuations
Certified Business Appraisal for SBA Loans
When does the SBA Require a Business Valuation?
Small businesses are the backbone of the United States economy. They bring jobs, opportunities, and innovation to communities and neighborhoods across the country.
The U.S. Small Business Administration (SBA) recognizes these SME enterprises’ role in stimulating economic activity. This helps small businesses grow by establishing guidelines for obtaining SBA loans and reducing lender risk. SBA business valuations are part of this loan guarantee process.
Here is a quick and dirty SBA loan calculator for you to use.
These measures help small firms acquire funds more easily. SBA loans typically occur between a bank and a small business owner, with a portion of the money being guaranteed by the SBA to the lender. This ensures the lender will recover a portion of the loan if the small business owner defaults.
The SBA Business Valuation Process
The SBA appraisal process is straightforward for an SBA loan application. Business Appraisal FL|GA|HI meets all the SBA appraisal requirements for a non-real estate loan or business valuation.
Additionally, SBA-backed funding often comes with benefits that may help propel the enterprise forward. Some loans, for example, will come with support through counseling and educational programming. This is to help you, as a business owner, learn how to use the SBA funding to finance your business effectively. Other loans will offer financial benefits like lower down payments and flexible overhead requirements. This will ease the loan procurement process for you as an individual, altogether.
SBA Loan Requirements
All small business administration or SBA loans over $250,000 require a qualified SBA business valuation. How much should an SBA loan small business valuation cost? Please read our article on business valuation pricing for all types of business valuations.
It is also important to note that the SBA does make direct loans to certain businesses. However, this assistance is often for those recovering from a declared disaster. Interestingly, firms of any size impacted by disasters in declared disaster areas can access this funding without business valuations.
Regardless of the reason business owners seek an SBA loan or the methods of securing the funding, an independent business valuation may be a requirement. An SBA business valuation may include the work of a commercial real estate appraisal and an equipment appraisal to produce your total market value.
The SBA suggests that such valuation is compulsory for the following reasons in their loan program:
- The amount you want to finance, not including the appraised value of the real estate and/or equipment, exceeds $250,000 for an SBA 7 A loan.
- You have a close relationship with either the buyer or the seller. Moreover, you are participating in a transaction with a family member or a personal business partner.
- You seek a loan from a lender whose internal policies and procedures necessitate that an expert business valuation occurs before any transaction takes place.
- You are selling your business to family members to keep the transaction at arm’s length without conflict of interest. Selling your business to a family member should always require business valuations to protect yourself from the IRS.
If your business requires an appraisal to qualify for an SBA loan, there are additional standards from the SBA one must follow. Those requirements are laid out in the SBA’s standard operating procedures and include that:
- The lender must request that the valuation be prepared. A valuation requested by and prepared for the applicant or seller will not be acceptable for the purposes of the SBA loan procurement process.
- The lender must specify the exact scope of work needed for the valuator so that such an individual understands whether the transaction is an asset purchase or a stock purchase. Additionally, the valuator should know the components included in the sale.
- The final business appraisal must display the valuator’s opinion of the business value. Additionally, the valuator must include his or her qualifications and signature on the appraisal.
- The appraisal must be conducted in accordance with the most up-to-date Uniform Standards of Professional Appraisal Practice (USPAP) requirements. This entity provides the standards that dictate the ethics and performance of valuators in the United States. The SBA wants your valuation done by a certified business appraiser.
If you are to seek a valuation to qualify for a loan, however, do keep in mind that such an appraisal must come from an expert and qualified source like BA FL|GA|HI. By definition, a qualified source is one who receives compensation for business appraisals. Additionally, these experts tend to be accredited by one of the following organizations:
- Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers.
- Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
- Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants.
- Certified Valuation Analyst (CVA) and Accredited Valuation Analysts (AVA) accredited through the National Association of Certified Valuation Analysts.
- Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.
However, it is important to remember that predatory lenders do exist. Sometimes, these lenders impose unfair tactics on borrowers that carry terms that benefit the lending partner at the borrowers’ expense. If you are interested in obtaining a loan through the SBA, it is important for you to keep the signs of predatory lending practices in mind. Some of those signs may include that:
- The lender fails to disclose how much the loan will cost.
- The lender demands access to your bank account to collect payments.
- The lender has a history of consumer complaints.
- They don’t use enough business valuation methods.
- The loan amount is less than $250,000.
SBA Business Valuation Conclusion
Small businesses face a variety of scenarios that impact their growth, finances, and success. Regardless, these enterprises are crucial to the success and movement of the U.S. economy. Consequently, the SBA offers guaranteed loans to help small businesses expand and succeed.
We have 20 years of experience helping small business owners with independent business valuation needs.
Regardless of your lender, you must obtain a valuation to secure an SBA-backed loan or funding source. Contact BA FL|GA|HI today to discuss your situation and our business appraisal or business valuation service for SBA loans.