SBA Loans, Valuation, Appraisal, and Collateral
History of the SBA
Small Business owners are an independent bunch, generally speaking, and this is a driving force behind their entrepreneurial spirit. The flip side of that is, particularly when they are at the beginning of their first of a new sort of business venture, they can feel like they are on their own with no one to turn to when they run into obstacles. The Small Business Administration, or SBA, can be an invaluable tool for small business owners at any point in the life of their business when they are running into roadblocks, but what is the SBA and how can it help small businesses thrive?
The Small Business Administration has been around for nearly 70 years now. It was founded in 1953 as an independent agency of the federal government dedicated to protecting the health of small businesses in the interest of maintaining free and competitive enterprise in the United States and its territories. With even a cursory knowledge of US and global economic history one could deduce that the SBA was created in response to two of the most seismic events both globally as much as domestically in the first half of the 20th Century, The Great Depression and World War II, and that is precisely the case.
The SBA was not the first federal program created to support business in the US, not by some distance, but it is the most durable, lasting organization at the federal level dedicated to small business in particular. The SBA is an evolution of a number of federal efforts, namely the Reconstruction Finance Corporation, or RFC, the Smaller War Plants Corporation, or SWPC, and the Small Defense Plants Administration, or SDPA. There are differences between these three organizations, but their function and goals all informed the creation and current role of the SBA.
The RFC, founded in 1932, was a product of the Hoover Administration that was created to relieve stress on American business in general that came as a result of The Great Depression. The difference between the RFC and its ultimate predecessor the SBA is precisely that the RFC supported businesses both small and large while the SBA operates to support small business specifically and defines clearly what constitutes a small business. The SWPC and SDPA shared the goal of the SBA in protecting the interests of small businesses, but with the key difference that the two former organizations were specifically designed to support small manufacturing operations in obtaining contracts for the production of wartime materials, most of which were going to large, established corporations. The SBA itself initially focused its efforts making sure that small businesses were given opportunity to capture government contracts and purchase government surplus. The SBA of today has far more diverse goals than its predecessors while having inherited much of the lending power.
SBA Today and SBA Loans
The Small Business Administration as it exists today no longer specializes, though this has not totally disappeared, in providing access to capital and education in connection with businesses that have direct relationships with the federal government and its contracts, but instead supports the overall health of the national economy through providing financial, technical, and education aid to small businesses across all industries. A large part of what the SBA does now comes in the form of outreach and programs that support specific groups of business owners and entrepreneurs that have traditionally lacked support such as women, minorities, and veterans of the US Armed Forces, but its support is available to all enterprises that are at least 51% owned by legal citizens of the US. Of the myriad services the SBA can provide support to small business owners, however, USAA is primarily engaged with SBA loans and acting as a vendor of Business Valuations, Machinery and Equipment Appraisals, and Auction Services for lenders and small businesses. Below we will outline the types of SBA loans and how we engage with them to provide value to all of our clients.
The SBA loan suite includes three categories of loans: the SBA 7(a) loan, the SBA 504 loan, and SBA Microloans. The SBA 7(a) loan is the most common type of credit that is guaranteed by the SBA and offered through lenders with a relationship with the agency due to its flexibility, followed by the SBA 504 loan which is stricter in its uses and reserved for loans in very large amounts. Both of these SBA loans can be a massive help to small businesses in ways that help them avoid the pitfalls that can arise with borrowing, ultimately protecting their real estate and machinery and equipment that may be used collateral, as well as their businesses as a whole. Microloans are less in the purview of USAA because their primary function is in starting or rebuilding small businesses that do not have much in the way of machinery or equipment to appraise nor ample history to provide an accurate business valuation, but we can still provide services that will aid in securing capital through this program.
The 7(a) Loan Program offered through the SBA is available in amounts up to $5 million for the following uses: short- and long-term working capital, refinance of existing business debt, and the purchase of furniture, fixtures, and supplies. The primary requirements of eligibility for the SBA loan product are that: the business operates for profit, the is considered a small business under the definition determined by the SBA, there is reasonable invested equity, and the business does or proposes to do business in the United States of its possessions. One caveat to that eligibility is that the business cannot be delinquent on any debt, such as tax, owed to the US government. How can USAA help in securing this type of SBA Loan? Let’s look at the process.
SBA Loan Process
Regardless of the type of SBA loan being applied for, the general process is quite similar. Like all things in business, this starts with a business plan. The SBA lender will need this plan to be sure the applicant has carefully considered whether or not the business is viable so they have assurance that they are not lending money to a business that is bound to fail. For the most efficient processing time, it is important that you select a delegated SBA lender as they are able to approve loans without having to send the application to the SBA for review. USAA is able to match business owners with SBA lenders with whom we have an ongoing working relationship to streamline this process, but the SBA also has a matching system that can be found here. After the owner completes the loan application for the delegated SBA lender, a credit analysis will be followed by an approval (or denial, but let’s leave that thought aside!) decision. At this point the SBA and the lender will agree on terms under which the SBA will guarantee all or part of the loan (this is the main advantage of SBA loans on the lender side). After that, the borrower will sign a note, provide any documents required, and, provided all terms and conditions are satisfied, wait for their loan funds to be dispersed and get to investing in their business!
Where is USAA in all of this? We actually provide a couple of very crucial services to the loan approval process without which many SBA loans would not be able to move forward at all: Equipment and Machinery Appraisals and Business Valuations. One or both of these will be required in any SBA loan approval process and they serve different but connected purposes. Both the Machinery and Equipment Appraisal and Business Valuation can have an enormous impact on whether the loan is approved and are pivotal in determining how much a lender is willing to allow a business owner to borrow. Needless to say, it can be critical to the success of a business to make sure that the M&E Appraisal and/or Business Valuation is done correctly by an experienced professional. In fact, the SBA requires that all M&E Appraisals be done by a certified appraisal professional that is independent of the transaction taking place.
Why are these services so critical to the life of an SBA Loan? In the case of the Machinery and Equipment Appraisal, the answer is collateral. As with any loan, an SBA Loan seeks certainty that the borrower will reasonably be able to repay the borrowed funds. While this can be ascertained through an examination of the revenue and expenses of a business, both of those things can fluctuate without much warning. Machinery and Equipment Appraisal allows businesses to use their value fixed assets as collateral for an SBA Loan while also decreasing the Equity Injection required to meet the requirements of the loan.
M&E Appraisals, Business Valuations, and Collateral
Because the SBA 7(a) Loan and SBA 504 Loan must be at least in part secured debt, an inaccurate M&E Appraisal can be disastrous. On the borrower’s side, the collateral, in this case the Machinery and Equipment that is being appraised and used to pay back the loan in the case of default, is going to determine the bulk of how much the lender is willing and able to extend as a loan. While the SBA will approve an under-collateralized loan, one in which the value of the collateral is less than the amount of the loan extended, this would require proof of very strong cash flow and the collateral will still be the main determining factor of how much can be borrowed. In short, if you want the maximum possible borrowing power, you need to be sure that the M&E Appraisal accurately estimates the worth of your collateral. On the lender’s side, if the value of the collateral comes in higher than what it could be sold for, they could be stuck with debt that they have no easy avenue to collect on.
A Business Valuation by an independent source is not necessarily a requirement for an SBA 7(a) or 540 loan, but if the amount financed minus the value of any real estate or equipment exceeds $250,000 the lender is not able to perform their own valuation. A Business Valuation in either case is a crucial piece of the loan because it will inform the amount a lender can extend to the borrower and also plays a role in determining the Equity Injection required to get an approval. A Business Valuation will include an M&E Appraisal in most cases, and the two are used together for important calculations. Of greatest interest to the borrower is that the Business Valuation will determine the value of the Intangible Assets a business holds, including goodwill, existing clients, patents, and non-competes. When Intangible Assets are less than $500,000 the size of the required equity injection required to secure certain loans is not defined by the SBA and thus is left for the lender to determine. If the Intangible Assets exceed $500,000, however, the required equity injection must be at least 25%, but this amount can be decreased by the value of tangible assets as determined by an independent real estate or M&E appraisal, depending on what is being used as collateral.
USAA
USAA has an experienced team that specializes in providing M&E Appraisals as well as Business Valuations for SBA Loan lenders. This gives us the advantage of having expert knowledge of the process, working relationships with a wide array of lenders, and, of course, a proven ability to perform these services to the highest standards. In the case of default, we also provide appraisal for auctions if assets must be liquidated and can even handle the auction ourselves. You can rest assured that our appraisers all hold the required certifications and follow USPAP guidelines as the SBA demands and our valuators hold the CVA designation that qualifies them to provide Business Valuations for SBA loan products. Our thousands of successful M&E Appraisals and Business Valuations speak for themselves, and if you are in need of a Business Valuation and/or M&E Appraisal that meets SBA Loan requirements, we would love to speak with you and provide a quote!
