Business Valuation Blog | Understanding Buying / Selling a Company

Why do I need a business valuation for bank financing?

Posted by Business Valuation Specialists LLC on Aug 23, 2017 2:24:00 PM


When you're working on securing a business loan, the last thing you may be thinking about is a business valuation. However, it should actually be one of the first aspects you should consider. When you get a business valuation for bank financing, you actually receive a much greater benefit than a simple figure that sums up your company's value, and the information it provides your financial institution makes it much easier to get through the paperwork and get to running your business.

Why do I need a business valuation for bank financing?

When you're trying to secure bank financing, the financial institution you're working with may require you to have a business valuation performed on the company you're purchasing or already own. When the housing bubble burst in 2008 and the various industrial bailouts happened, there were many new regulations put into place that require entrepreneurs to prove better intention of paying back the loans they had taken out. That lead to a tightening of the approval process. Fortunately, this is one area where having a business valuation performed by a certified business appraiser can help you secure your loan more easily.

When appraisers go through the certification process, they learn not only how to value a business, but how to do so using a series of standardized methodologies. Why? As the appraisal process has moved forward, there have been plenty of opportunities to test appraisal calculations and processes in legal, insurance and financial circles. Those calculations that did not bear out have been eliminated from standardized practice over time while those that worked well have been upheld time and again. 

As time progressed, the certification process began to include the methodologies that have worked well. Because these methodologies have been used time and again, business valuations performed by certified appraisers began to hold more weight. In financial circles, banks and other financial institutions have come to realize that a business appraisal report completed by a certified appraiser is much more likely to have accurate values, so they don't need to worry about losing money.

But the appraisal report contains much more than a simple figure determining your company's value. It also contains information about where your company is strong, and where it is weak. It provides you with dynamic insights to help you improve your business' poor performance in some areas while allowing you to grow the practices and processes that have lead to areas of strength. It will give you a solid overview of the condition of the market, your competitors and where you fit into your industry as a whole. By having this information and taking action based on the report, you can quickly improve your business' bottom line and overall value, whether it's by revamping your accounts receivable process, expanding your research and development department or any other improvements you find wanting.

As you can see, getting a business valuation for bank financing provides you with significantly more information than what you may expect, but how you use that information to your company's benefit is up to you. By harnessing that information, you can quickly create a more dynamic, responsive business. In our current age of digitization and disruption, a business valuation provides you with the insights and flexibility you need to keep your business ahead of the curve.

Topics: bank financing, SBA Loan