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How Are Small Business Valuations Useful for Banks?

Business valuation software

Small business lenders like national banks, community banks, credit unions and other SBA service providers are frequently called upon to assess the value of a business. What most people don’t know is that when it comes to how to value a company, there are actually several different methodologies that can be used, depending on the purpose of the business valuation. Each method produces a different result.

What is a small business valuation?
Business valuation appraisal has two key starting points: first, you need to determine the reasons for the company valuation. And second, you need to collect all necessary information.
The information can be fed to business valuation software, and the correct methodology specified. This can be based on three different approaches:

  • First, the worth of a business can be determined by comparing its recent sales to those by other similar businesses
  • Second, the small business valuation can be based on its earning power and risk assessment.
  • The third way how to value a company is determined by referring to the company?s assets.

Small business valuation software can provide quick and accurate results that are necessary for lending decisions.
What documents will be needed?
Key inputs needed for small business valuation are financial information such as income statements and balance sheets. For an accurate assessment, three to five years of such documentation should be provided.
How do banks use small business valuations?
Most often, banks need information about the worth of a business if they are trying to make a decision about a loan. The business may have applied for a loan to add infrastructure or employees, to open a new branch or location, or to expand their operations.
To make a correct decision, banks need information about the worth of a business and also about the methods used how to value a company.
What is the purpose of the valuation?
It’s important to remember that business value is not an absolute. The answer you get depends on the methodology used. There are two key elements in how to value a company: the methods used and the purpose of the valuation.
The answers you get depend on these two factors which are also known as the standard of value and the premise of value. Business valuation software can provide quick and accurate results about the value of the company, allowing banks and other lenders like community banks, credit unions and other SBA service providers to make quick and fair lending decisions.

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