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SBA 7(a): Denial of the Guaranty on Business Valuations and Appraisals

Posted by Prudent Lenders in SBA 7(a) Lessons Learned – SBA Question? - Ask the Experts with No Comments

The SBA requires all lenders to have business valuations conducted for a loan to finance a change in ownership. Failure to adequately justify the value of the business acquired with loan proceeds, in many cases, may warrant a repair or full denial of the guaranty. The SBA has two concerns: 1) that loan proceeds are not used to purchase assets, including goodwill, at fair market value because it is a waste of program funding and 2) that borrowers are not taken advantage of by dishonest brokers and that such borrowers pay fair value for assets to be purchased. However, in a guaranty repurchase context, a lender can mitigate the risk to the guarantee if the lender can provide a “forensic” valuation dated “as of” the time of origination and reflective of information available at the time of loan approval. If the valuation reflects a value lower than the purchase price, a repair is usually warranted. The same applies to real property appraisals.

For more information of SBA loan programs, contact Prudent Lenders.

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