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.
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 the role that these enterprises play in stimulating economic activity and, therefore, helps small businesses grow by establishing guidelines for them to obtain loans while simultaneously reducing lender risk.
Overall, these measures help make it easier for small firms to get needed funding. This is because SBA loans typically occur between a bank and a small business owner with a portion of the money being lent as guaranteed from the SBA to the lender. This ensures the lender that they will recover a portion of the loaned amount if the small business owner were ever to default.
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 to help you, as a business owner, learn how to effectively use the funding to finance your business. Other loans will offer financial benefits like lower down payments and flexible overhead requirements to ease the procurement process of the loan for you as an individual, altogether.
It is also important to note that the SBA does make direct loans to certain businesses; however, this sort of assistance is often given to those recovering from a declared disaster. Interestingly, firms of any size that have been impacted by disasters in declared disaster areas can access this sort of funding.
Regardless of the reason you seek an SBA loan or how such funding is secured, you may be required to obtain an independent business valuation.
The SBA suggests that such valuation is required for the following reasons:
- The amount you seek to be financed, not including the appraised value of the real estate and/or equipment, exceeds $250,000.
- 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.
If your business requires an appraisal to qualify for an SBA loan, there are additional standards set out by the SBA that must also be adhered to. Those requirements are laid out in the SBA’s standard operating procedures and include that:
- The lender must request for the valuation to 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 to the valuator so that such an individual has a complete understanding of whether the transaction is an asset purchase or stock purchase. Additionally, the valuator should know what components are being included as part of 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 updated 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.
If you are required to seek a valuation to qualify for a loan, however, do keep in mind that such appraisal must come from an expert and qualified source like BAF | G. By definition, a qualified source is one that 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.
It is important to keep in mind, however, that predatory lenders do exist. Sometimes, these lenders impose unfair tactics on borrowers that carry terms that ultimately 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.
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 that can help small businesses expand and succeed. Regardless of your particular lender, you will likely need to obtain a valuation to secure an SBA-backed loan or funding source. Contact BAF|G today to discuss your situation and our business appraisal services for SBA loans.