When is a Business Valuation Needed for SBA Loans?

SBA loans are an excellent source of funding for small businesses.

When completing the loan, small business owners must be able to present the original business license or certificate of doing business. Stamp the corporate seal on the SBA loan application form if the company is a corporation. According to the SBA, all commercial property on which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is issued as security for a loan or debenture must undergo an environmental investigation. Depending on the level of contamination risk, the type and complexity of environmental investigation required will vary.

Business valuation and SBA loans

A business valuation is a process of establishing a company’s economic value and providing owners with an objective estimate of its worth. A business appraisal is typically performed when an owner wishes to sell all or part of their firm or merge with another. Assets minus liabilities equals business value. Anything that has monetary value, such as real estate, equipment, or inventory, is considered a business asset. A loan from the Small Business Administration (SBA) could be the answer you’re looking for. SBA loans with low-interest rates and extended terms are a viable alternative for business owners who have suffered significant physical or economic damage as a result of a disaster or who want to expand their business but can’t get any other non-government funding.

Understand business valuation

A set of techniques and procedures used to evaluate the economic value of an entity or set of assets is known as a business valuation. The business valuation specialist must define standards and premises of value at the start of the collaboration. Two examples of value standards reflect the investment value that a specific investment may acquire via cost synergies, and fair value, which reflects the investment value that a single investor can obtain through cost synergies.

Why do businesses need a business valuation?

Surprisingly, many business owners neglect to evaluate their company’s worth and prospects yearly. You put in a lot of effort to create this asset, and you should be aware of its current and future value. Most of us go to the doctor once a year to have our vitals examined, and prioritizing your business in the same way is a good idea. Create a baseline value for your business so you can see where you stand in the market. Understand how far your business has progressed since its inception. Recognize how your organization competes right now. When you measure this data, you can quantify it in a more meaningful way that inspires both you and your staff to strive for greater success in the future.

What are SBA loans and loan programs?

An SBA loan is a government-backed small-business loan that can be used to fund things like startup expenditures, expansions, and real estate purchases. A private lender issues this sort of loan, but the federal government backs it. An SBA loan is obtained through a lending institution such as a bank or credit union. The lender then applies to the SBA for a loan guarantee, which means the government will pay the lender the guaranteed amount if you default on an SBA loan. According to the SBA, everyone with at least 20% ownership in a corporation must provide an unqualified personal guarantee.

Benefits of using SBA loan programs

Benefits of using SBA loan programs

  • Availability of capital – SBA loan fees typically include a one-time guarantee fee based on the loan amount and maturity, as well as a yearly service cost based on the guaranteed portion of the outstanding balance. Every year, the SBA reviews its charge structure. Fees for SBA 7(a) loans for less than $350,000 are presently waived.
  • Low interest rates – It’s impossible to offer an exact number to the typical SBA loan rate because most SBA loan interest rates fluctuate over time depending on the prime rate or another variable base rate. SBA loans, on the other hand, SBA loans have lower interest rates than those offered by commercial lenders.
  • Helpful term length – Another advantage of SBA loans is that you have more time to repay them, allowing you to save money for other business needs. The loan length will be determined by how you intend to use the funds.
  • Lower down payment – SBA loans typically have two types of fees: an upfront guarantee charge based on the loan amount and maturity and a yearly service fee based on the guaranteed share of the outstanding debt. Every year, the SBA reviews its charge structure.
  • SBA resources partners’ access – A resource partner is a local company that understands and empathizes with the unique issues and demands of startups, such as access to knowledge, budget management, and the need for flexibility. It serves as a preferred service provider that addresses crucial resource needs.

Business valuation for SBA loans

The important component of any loan application for a change of ownership in determining the firm’s value (excluding real estate, is evaluated separately through a real estate assessment, because the change in ownership would result in new debt unrelated to the business operations and the potential formation of intangible assets.

Why and when do SBA loans require an independent business valuation?

An SBA loan is a loan between a bank and a small business owner in which the lender receives a guarantee for a part of the money they lend to the small business owner. This protects lenders by guaranteeing a portion of the loan amount in the event that the small business owner defaults. SBA loans are designed to assist small businesses in obtaining affordable financing. When the SBA requires a business valuation, it must be done by a “qualified source” which is an individual who receives remuneration for business appraisals regularly and is accredited by one of the following recognized organizations.

Requirements for getting a business valuation for SBA loans

When the loan amount is less than $250,000, the lender may conduct its own business valuation. If the loan exceeds $250,000 or if the buyer and seller have a close relationship, such as family, the lender must get an independent business appraisal from a qualified source. The valuation firm will typically require documentation identical to that required for the loan application, which will most likely include:

  • 3-5 years of tax returns from the company.
  • Statements of Interim (within 90 days of the valuation date)
  • AR and AP Aging
  • Budgeting or management forecasting (if available)
  • A Questionnaire on an Appraisal Completion
  • Internal loan write-up: Purchase Agreement or Letter of Intent

Rules you should know before performing a business valuation

It’s important to do some research to make sure you are getting the right information before you have a business valuation performed. Here are some rules to consider before a business valuation:

Rules you should know before performing a business valuation

  • Research and know SBA’s SOP – Financial documents, contracts, customer/supplier agreements, leases, loans, and all other responsibilities that will affect future business profitability should be reviewed; the client should gather these records and give them to the appraiser. This checklist for valuing a business provides an overview of the data required for A thorough evaluation. In addition, the valuation specialist will gather data on the financial performance of similar organizations to compare.
  • Get qualified sources – The anticipation of future cash flows provides value in the eyes of a buyer or investor. The current strategy and prior success of the company can be used to forecast future value. Using this data, you may forecast future revenues, operational expenses, taxes, capital requirements, cost of capital, and market share. When these KPIs are compared to those of other firms, similar organizations can also provide insight into the future prospects of the subject company.
  • Prepare for the valuation – The valuation purpose, the basis and assumption of value, and, in some cases, the availability (or lack thereof) of relevant data all have an impact on which valuation technique or approaches are optimal. The three basic valuation methodologies used in the business valuation process are the market, income, and cost approaches. Numerous ways of assessing value will be employed in many contexts, with the values obtained by each methodology being averaged to produce a defensible value.
  • Maintain valuation report – A valuation report is a certified valuer’s professional assessment of a property’s market value. The analysis is based on the home’s overall condition (as determined by a visit), recent and relevant sales history, and other market data. A business valuation report attempts to document this comprehensively. It analyzes the value of a firm or a group of assets by taking into account all-important market, industrial, and economic factors.

How do you perform the business valuation for SBA loans?

The value of the intangible assets is determined by subtracting the sum of the working capital assets and fixed assets being purchased from the value of the business as established by the business appraisal. Learning how to calculate a company’s valuation is crucial whether you need to evaluate a small business for sale, sell your firm, acquire a round of funding, or find a means to pay your employees. You may lose out on earning potential if your company’s valuation is incorrect. It’s not as difficult as you would imagine to value a company. We’ll go over the fundamentals of small business valuation, as well as business valuation methods and how to utilize them to determine a company’s value.

Factors you should know about business valuation for SBA loans

The Small Business Administration (SBA) offers a number of lending programs to assist firms in obtaining affordable funding. The popular 7 (a) program offers SBA-guaranteed business acquisition loans with competitive interest rates, longer payback durations, and other perks to small businesses interested in acquisitions.

  • Profit margins – After deducting expenses, the profit margin is defined as the percentage of sales retained as income by a corporation. As of March 31, 2022, SBA Communications’ net profit margin was 18.4%.
  • Size measures – The highest size that a business (including its subsidiaries and affiliates) can have to remain categorized as a small business for SBA and federal contracting programs is the size standard, which is commonly indicated in the number of employees or average annual receipts. The term “little” has different meanings in different industries.
  • Growth rate – Based on past behavior, we may expect the average SBA loan interest rate to climb by just over 0.5% by the end of 2022 if the Fed raises interest rates by 0.75% as predicted by investors. By the end of 2022, we expect the average SBA interest rate to be 6.06%.
  • Dispersion of multiples – There is no limit to how many SBA loans you can have at any given moment. On the other hand, certain SBA lenders will have restrictions, and they’ll be the ones footing the bill. Check with your lender to determine if you can get numerous SBA loans.
  • Non-recurring events – A nonrecurring item is an entry that appears on a company’s financial statements that is infrequent or irregular. Because the distinction between extraordinary and nonrecurring items is typically subjective, extraordinary items are frequently grouped with nonrecurring items.
  • Multiples correlation – The coefficient of multiple correlations is a statistic that measures how effectively a variable can be predicted using a linear function of a group of other variables. It is the linearly computed correlation between the variable’s values and the best predictions from the predictive variables.

Business valuation approaches for SBA loans

The final phases in comprehending your business valuation include the methods used to establish the worth of your firm and the discounts employed to arrive at the final interest value. While valuation methodologies and discounts significantly impact the final conclusion of value, the principle of “garbage in, junk out” can also be important. If the company’s historical or predicted financial data isn’t accurate, or the normalizations don’t accurately reflect the company’s future benefit stream.

  • Asset approach – The cost approach, asset approach, and replacement cost approach are all terms used to describe the asset-based strategy. The asset strategy is based on the following theory: The current value of all tangible and intangible assets minus the current value of all liabilities equals the current value of the company’s equity.
  • Market approach – The market approach is a method for calculating an asset’s worth based on the selling price of similar assets. Along with the cost technique and discounted cash-flow analysis, it is one of three main valuation methodologies.
  • Income approach – In the valuation of functioning enterprises, the income approach is frequently utilized as the principal strategy. The two most common income approaches are the following: The CCF method is a single-period valuation methodology that divides a company’s benefit stream by a growth-adjusted rate of return to arrive at a value (capitalization rate). This strategy is used when a corporation expects perpetuity, long-term, predictable cash flows.

Which approaches or multiples should you rely on for business valuation of SBA loans?

When contemplating the market approach for SBA company valuation engagements, appraisers have a variety of options. When considering the fact that data sources are not all reported in the same way, the applicability of comparable companies, unknown factors not reported in the data, and the level of control indicated by each method (controlling versus minority), among other things, the confusion can be overwhelming.

Get the industry’s best help in business valuation for SBA loans with Eqvista!

SBA loans are an excellent source of funding for small businesses. All stakeholders must understand when an independent business valuation is required, who is competent to generate them, and the particular parameters that valuation analysts must follow when doing so. Eqvista has a team of experts who can help you with the business valuation for SBA loans, which are much more efficient and easier to get for your industry. Fill up the sign-up form and get started with us.

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