While once considered “the lender of last resort,” the SBA program has turned into a great tool for qualified business to access capital that otherwise might be slightly out of reach.
Congress established the SBA 7(a) loan program (named after section 7[a] of the Small Business Act) in 1953.3 The program is designed to serve creditworthy small business borrowers who cannot otherwise obtain credit at reasonable terms and do not have other sources of financing. The program provides lenders with a guaranty that if a loan defaults, the SBA will pay off the federally guaranteed portion of the remaining loan balance. In 2011, more than 3,500 lenders originated 7(a) loans. Between 2002 and 2013, the program’s guaranty supported more than $168 billion in loans to small businesses. While the number of 7(a) loans has declined since its 2007 peak, the dollar amount of loans has rebounded to new highs after dropping during the 2008 financial crisis (see figures 1 and 2).
First, bear in mind that while you may fit into the below criteria, the lender will actually be the one deciding whether they are willing to underwrite your proposed loan. Here are some of the main requirements:
- The business must be “small” as defined by the SBA’s small business size standards
- The business must not engage in “prohibited activities” – of their their are a laundry list
- The proceeds of the loan must be used for an eligible purpose
Business Valuation Requirements for SBA Loans
All SBA loans that have over $250,000 in goodwill (or “blue sky” as some people say) require an independent, third party valuation. Some lenders require that all SBA loans receive a third party valuation. When it comes to the valuation itself:
- The bank must engage the valuation firm (not the borrower or seller)
- The person performing the valuation must be “qualified” – more on that in a minute
The definition of qualified has changed some over the years as the SBA has refined its requirements. Generally speaking, qualified means that the person performing the valuation is credentialed and conducts valuations on a routine basis. The most recognized qualfied credentials include:
- Certified Valuation Analysts (CVA)
- Acreddited Senior Appraiser (ASA)
Note that CPA’s have specifically been excluded from the list of qualified sources unless they have a valuation specific credential. This makes sense. Business valuation is a very separate field from accounting, so unless a CPA is routinely performing valuation work then a CPA credential alone would not qualify someone to perform such work.