Business loans are much more challenging to obtain than personal loans. As Ferrari Energy explains, financial institutions often require appraisals or full business valuations before they are willing to extend credit to businesses.
There are many reasons why these banks and even the Small Business Administration require company valuations before they lend money. If you’re looking to borrow money for your company, here is some insight into what to expect from the process.
Why Banks Require a Valuation
Today, bank standards used to determine which businesses they lend money to stem from 2008. When the real estate bubble burst, new regulations were put in place that required business owners to prove that they had a legitimate intention of repaying a loan. As a result, it became more difficult to gain credit.
Since then, banks have loosened their standards a bit, but they still often require full business valuations before giving a loan. When banks obtain a certified appraisal of your business, they get an independent assessment of the value of your business, which helps them feel good about the credit they extend.
The appraisal process provides supplementary financial documents to the business owner and gives them to someone with no vested interest in the transaction.
When the SBA Requires Valuations
SBA-backed loans are very popular because they open credit possibilities for small- to medium-sized businesses. If you are getting a loan that the SBA backs, there are certain situations in which you will be required to have an independent valuation of your company completed.
The SBA requires an independent business valuation to be completed by a qualified source in three situations:
- The total financed amount of the loan exceeds $250,000 — excluding the appraised value of any equipment or real estate.
- The seller and buyer in a transaction that the loan will finance have a close relationship, such as one family member buying the business from another family member.
- The private lender’s own procedures and/or policies require it.
These three scenarios cover most SBA loan requests. So, be prepared for an independent business valuation if you seek an SBA-backed loan.
How a Business Valuation Benefits You
Entrepreneurs may be frustrated that they have to get an independent business valuation before getting a bank loan. However, as Adam Ferrari, CEO of Ferrari Energy, explains, there is a lot of information included in these valuations that business owners can use to improve their operations.
In addition to placing a dollar value on the business, the valuation will point out strengths and weaknesses in the company. These dynamic insights can help you identify areas you need to improve or expand on.
They’re especially beneficial as the analysis is done by an independent third party who has no prior knowledge of your company in most cases. In other words, their conclusions won’t be clouded by existing and/or internal knowledge.
In addition, the business valuation will include a detailed breakdown of your industry, with comparisons of where your company fits compared to competitors. Without an independent business valuation, it may be hard to obtain this useful information, which is why you shouldn’t scoff if a bank requires these audits before they loan you money.
Instead, you should approach a required independent valuation of your business as a welcomed development. It will help you get approved for the credit that you need. It’ll provide you with advantageous knowledge and insights into your own business that you may not have received otherwise.