Small businesses have long relied on the Small Business Administration (SBA) as a source of loans to meet their financing needs and capital expansion.
The SBA added a provision in its SOP requiring independent business valuations/appraisals from qualified appraisers. These appraisals had to fall under the circumstances for General Small Business Loans [SBA 7 (a) loans].
Although there are several loan programs offered by the SBA, the 7 (a) Loan Program is different from traditional ones. This is a multi-purpose business loan which can be used to refinance debt, fund working capital requirements, and purchase inventory.
In this loan program, the SBA guarantees a portion of the loan issued by a lender which makes it a good fit for entrepreneurs with less established credit histories.
The lender takes into account some points when determining the need for business appraisals.
Primary Purpose Of Business Valuation/Appraisals
Before we discuss the circumstances which necessitate a business valuation, let’s describe the purpose of a business valuation when applying for a SBA loan. The independent audit determines a business’ acquisition price.
SBA valuations must focus on:
- The performance of the business under its current owner instead of based on the buyer’s projections.
- The fulfillment of SBA’s current SOP requirements.
- To ensure independence of the appraisal, the valuation expert must be paid directly from the lender.
- Generally, SBA valuations involve the sale of business assets during a change in ownership. These assumptions are to be kept under consideration when performing the appraisal.
A Business Appraisal Is Needed When…
If you are pursuing a particular SBA loan program, your lender will judge if an independent business appraisal is necessary. The below-mentioned points will also help determine if the provisions of the SBA SOP apply or not.
- Is the loan a 7 (a) guaranteed loan? In case it is not, does the SBA SOP apply to it?
- What is the purpose of the loan? If it’s for debt refinancing, has the original debt been used to change ownership? Is so, valuation is required.
- Has there been a transaction involving a change in ownership via sale of company? In case it is not, a valuation is not necessary.
- If the total amount being financed surpasses $250,000 a business appraisal is needed. This amount is calculated by totaling finances from all sources and deducting the real estate or equipment’s appraised value from this amount.
- A valuation is required if the buyer and seller are closely related (for example, family members).
To get a complete business appraisal performed or to receive guidance regarding the subject, get in touch with Independent Appraisal Experts LLC. We provide top-notch, nationwide appraisal services including machinery valuation and equipment appraisal.
To request a proposal, call us at +1-(801)-809-2565.
