For SBA lenders, evaluating a loan application is simple when the borrower has years of financial statements to review. The challenge arises when working with startups and new ventures that have no operating history. In these cases, a feasibility study helps a lender judge whether a business can realistically succeed before capital is committed. This article explains what a feasibility study is, the situations that call for one, and when an SBA loan is likely to require it.
As a professional valuation firm, Peak Business Valuation provides independent market feasibility studies for lenders and borrowers. Our financial analysts evaluate factors like market demand, competition, and revenue potential to give lenders objective insights. We are happy to answer any questions you have about the process. Schedule a free consultation below to get started.
What Is a Feasibility Study?
A feasibility study is an analysis that tests whether a proposed business or project can succeed before funds are committed. As such, it examines key factors that determine success, including market demand, competition, location, operations, and projected finances. For an SBA lender, the value of a feasibility study lies in its independence. Because the analysis is prepared by a neutral third party, it offers objective insight on the venture’s viability.
While there are various types of feasibility studies, the most relevant study for new ventures is a market feasibility study. It measures whether there is enough market demand to support the proposed business according to the borrower’s projections. With this analysis in hand, SBA lenders can assess the repayment outlook and identify risks that borrowers may overlook. For more information about this analysis, see What Is a Feasibility Study Report?
Key Signs You Need a Feasibility Study
There is no single moment when a feasibility study becomes a necessity. However, there are certain conditions where it is a beneficial tool. The situations below are the most common reasons an SBA lender should consider requiring a feasibility study during underwriting.
Startups With No Operating History
Startups present a unique challenge because they have no financial history to evaluate. An SBA lender cannot review past revenue or earnings to judge whether the business will perform. Instead, the credit decision depends on projections, which are only as reliable as the borrower’s assumptions. A feasibility study tests those assumptions against real market conditions, giving the lender a credible foundation for the decision.
Ground-Up Construction Projects
When a loan funds the construction of a new facility rather than the purchase of an operating business, there is no existing cash flow to support the debt. As such, the project must generate enough demand once it opens to cover its payments. A feasibility study evaluates whether the completed facility will attract the customers and revenue the borrower expects. This step is especially important when the development enters an untested market.
Special-Purpose or Limited-Market Properties
Some properties are built for a single use and appeal to a small pool of buyers. This includes businesses such as hotels, assisted living facilities, car washes, and gas stations. These ventures carry greater risk because they may have weaker cash flow potential and few alternative uses. This reduces the SBA lender’s ability to recover value if the project fails. A feasibility study helps minimize that risk by determining whether the market can support the proposed location.
Ventures With Unproven Demand
One of the most compelling situations to obtain a feasibility study is when demand is uncertain. When a borrower’s revenue projections are based on assumptions about a market, those numbers should be scrutinized. A market feasibility study tests demand, competition, and pricing against current conditions in the trade area. For an SBA lender, this analysis provides a credible estimate of what the business can reasonably expect to earn.
If you need a reliable feasibility study, it is best to work with a qualified valuation firm. Peak Business Valuation prepares independent market feasibility studies that help SBA lenders evaluate applications. To learn more, schedule a free consultation with Peak below.
When Does an SBA Loan Require a Feasibility Study?
The SBA does not strictly require a feasibility study on every loan. Under the current SOP 50 10 8, the need for a feasibility study depends on the project and the lender’s judgment. Generally, SBA loans for special-purpose properties are where a feasibility study most often comes up. When an SBA loan finances a property such as a hotel or an assisted living facility, the SOP requires a professional going-concern appraisal. Lenders commonly pair that appraisal with a feasibility study to confirm that the demand supports the appraised value.
Peak Business Valuation works with over 100 SBA lenders across the country. We are happy to support your lending decisions with an independent feasibility study.
Conclusion
A feasibility study helps SBA lenders understand whether a new project can generate enough demand and cash flow to repay the loan. It is most useful when financial history is limited, or market assumptions need to be validated. As part of the study, an analyst evaluates demand, competition, and projected performance. This helps show whether the borrower’s expectations are realistic and whether the project can carry its debt.
Peak Business Valuation provides independent market feasibility studies that give SBA lenders objective insight into a proposed venture. If you have questions about how a market feasibility study can support your credit decisions, we are here to help. Schedule your free consultation with Peak Business Valuation below to get started.
