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Small businesses are the backbone of the economy, and securing financing is crucial for growth and stability. One popular option for small businesses is an SBA loan, a type of financing backed by the Small Business Administration (SBA). Here’s what you need to know about applying for an SBA loan and the importance of business valuation in the process.

Benefits of SBA Loans

SBA loans offer several benefits for small businesses. These benefits often make SBA loans more attractive compared to conventional loans:

• Lower Down Payments: SBA loans typically require lower down payments, often as low as 10% of the total project cost, which helps preserve cash flow for other business needs.
• Longer Repayment Terms: Repayment terms can extend up to 25 years for real estate and 10 years for equipment and working capital. Longer terms result in lower monthly payments.
• Competitive Interest Rates: SBA loan interest rates are generally competitive, often lower than those offered for non-SBA loans, making them more affordable over the life of the loan.
• Flexible Use of Funds: SBA loans can be used for a wide variety of purposes, including working capital, inventory, equipment purchase, real estate acquisition, and business expansion.
• Easier Qualification: The SBA guarantee reduces the risk for lenders, which can make it easier for businesses with less-than-perfect credit or limited collateral to qualify for a loan.
• Support for Small Businesses: The SBA focuses on supporting small businesses, offering various resources, counseling, and training to help businesses succeed and grow.

There are additional benefits attached to the program since SBA loans often encourage community development and job creation, borrowers have access to counseling and training through SBA’s network of resource partners, and it could help you improve your business credit, making it easier to obtain future financing.

Applying for an SBA Loan – Business Valuations

These loans are not directly issued by the SBA but are guaranteed by the agency, which reduces the risk for lenders and makes it easier for small businesses to obtain financing. To apply for an SBA loan, you must first determine if your business meets the SBA’s size standards, which is crucial for eligibility.

Size standards are typically based on the number of employees or annual revenue and vary by industry. The size threshold by number of employees is up to 1,500 while the size threshold by annual revenue is up to $47 million.

In addition to meeting the size standards, your business must:

• Be a for-profit business of any legal structure
• Be independently owned and operated
• Not be nationally dominant in its field
• Be physically located and operate in the U.S. or its territories (businesses outside the U.S. may still qualify subject to certain conditions)

Once the requisites are fulfilled, you will need to start gathering all necessary documentation, including financial statements, tax returns, and business plans. The next step is to choose an SBA-approved lender and discuss your loan alternatives. There are several options available within the program:

• 7(a) Loan Program: The most common and flexible type of SBA loan, used for a wide variety of business purposes, including working capital, equipment purchase, and real estate acquisition.
• 504 Loan Program: Provides long-term, fixed-rate financing for major assets such as real estate and equipment. These loans are typically used for expansion or modernization.
• Microloan Program: Offers small loans (up to $50,000) to help small businesses and certain not-for-profit childcare centers start up and expand.
• Disaster Loans: Provide low-interest loans to businesses, homeowners, and renters affected by declared disasters.
• SBA Express Loans: Offer faster processing times for amounts up to $350,000, with less paperwork and more flexible requirements.

With the lender selected, you can complete the SBA loan application and submit it along with all required documentation.

The Role of an Appraiser in the SBA Loan Process

An appraiser can play a crucial role in the SBA loan process, particularly when the loan involves real estate or significant assets. Here’s how an appraiser can help you secure an SBA loan:

Valuation of Collateral: An appraiser provides an accurate and unbiased valuation of the property or assets being used as collateral for the loan. This helps the lender determine the loan-to-value (LTV) ratio, which is critical for loan approval. The SBA often requires an independent appraisal for loans involving real estate or large equipment purchases to ensure the collateral’s value justifies the loan amount.

Establishing Market Value: If your SBA loan involves purchasing or refinancing commercial real estate, an appraiser assesses the current market value of the property. This valuation is essential for both the lender and the SBA to ensure the property is worth the investment. For loans involving substantial business assets, such as equipment, an appraiser determines the market value of these assets, helping to secure financing based on their worth.

Supporting Loan Approval: An appraisal report provides credible and professional documentation that supports your loan application. Lenders and the SBA rely on these reports to make informed lending decisions. Accurate appraisals help mitigate the lender’s risk by ensuring that the collateral is sufficient to cover the loan amount in case of default.

Facilitating Negotiations: If you’re buying a business, an appraisal helps justify the purchase price to both the seller and the lender. This can streamline negotiations and support your loan application with solid data. An appraiser ensures you are not overpaying for property or assets, which can help prevent potential financial issues down the road.

Compliance with SBA Guidelines: SBA loans require appraisals to comply with specific standards, such as the Uniform Standards of Professional Appraisal Practice (USPAP). A certified appraiser ensures that all necessary guidelines and standards are met. An appraisal can verify that the property’s use and value align with SBA eligibility criteria, helping to avoid potential issues during the loan review process.

The Importance of a Business Appraisal: How can I Appraise my Business?

Obtaining a business valuation is a critical step in securing an SBA loan. This assessment determines the economic value of your business and is required by lenders to understand the business’s worth, assess loan risks, and determine appropriate loan amounts.

An accurate business valuation is vital because it directly influences the lender’s decision on loan approval. It ensures that you receive fair financing based on your business’s true value and helps avoid over-leveraging or under-capitalizing your business.

Business valuations are conducted by:

• reviewing financial statements to assess a company’s historical performance and developing forecasts or projections on sustainable profitability within the Income Approach;
• comparing the company to similar businesses operating in the same industry, comparing performances, and transacted prices to estimate market value within the Market Approach; and
• appraising tangible and intangible assets at market value within the Asset Approach.

Selecting an experienced valuation firm with accredited experts such as Los Angeles Business Valuations is essential because they provide credible valuations that lenders trust. They have expertise in various industries and valuation methods and ensure compliance with SBA requirements.

In conclusion, partnering with a reliable business valuation firm like Los Angeles Business Valuations is crucial when applying for an SBA loan. Our expertise ensures that your application is supported by a thorough and accurate valuation, increasing your chances of securing the necessary funding.

For expert business valuation services, contact us at Los Angeles Business Valuation or purchase any of our package services.