Best Practices: Business Licenses

Prior to disbursement of Loan proceeds of an SBA 7(a) loan, all SBA lenders must obtain certain due diligence information from the small business applicant to comply with the terms and conditions of the SBA Loan Authorization. SBA requires lenders to obtain evidence that the Borrower and Operating Company have the requisite licenses, permits and other approvals necessary to lawfully operate the business, including, but not limited to, the ability to operate at the business location. Many small business applicants are first time entrepreneurs and often seek the guidance and expertise of their seasoned lenders for advice concerning appropriate licenses. This article will briefly discuss types of licenses, resources for small business applicants, and some caveats for lenders looking to assist their customers with licensing due diligence.

Types of licenses

Obtaining the appropriate business licenses can be a straightforward or complicated process depending on the type of business and where the business is located. Licensing for retail type businesses often only require a general business license and sales and use tax license or permit. For restaurants, relevant licenses may include a health department license, food safety certification, and liquor license. Small business borrowers are often perplexed when they have a service-based business, and many assume that no business licenses are needed to run such a business. However, if it is a professional business (i.e., medical/legal/dental/financial/beauty), borrower will need to provide evidence of its specific professional license. It’s important to obtain copies of all licenses in the correct legal name of the small business and/or individual license holder.

Investigating licensing requirements

Small business borrowers have several resources at their disposal to assist them with obtaining the necessary licenses to lawfully operate their business. The applicant can hire its own legal counsel or accountant who may be familiar with the borrower’s industry and can provide guidance on the licensing process and requirements. If the applicant does not have advisors, a good starting point is an online search of the websites for the Secretary of State, county and local municipality where their business is located. SBA has useful information here: Apply for licenses and permits (sba.gov). The SBA site also links to free business counseling through SCORE, Small Business Development Centers, Women’s Business Center, or Veterans Business Outreach programs located in the borrower’s community once they enter their zip code. For business acquisitions, a good first step is to inquire what licenses the seller uses to operate the business.

Caveats for lenders 

Many experienced lenders are eager to assist their small business customers in completing their due diligence requirements, and often provide information and license requirements to borrowers as part of the closing checklist. While it is helpful to list out certain license requirements as a starting point, lenders should make clear that the borrower is solely responsible for obtaining all required licenses and permits. Any conditions contained in lender’s closing checklist are the minimum requirements lender expects to receive, however the list may not include all licenses that the borrower needs to lawfully operate its business. Ultimately, the borrower must make its own independent investigation as to the needed business licenses and certify to the lender that it has all licenses required to operate its business.

For SBA closing and compliance questions, contact the attorneys at Starfield & Smith, PC at info@starfieldsmith.com.