Best Practices: Why Do You Need a Business License Anyway?

Although there is no extensive discussion in the SBA’s Standard Operating Procedure 50 10 7.1 (SOP) regarding borrower’s compliance with business license requirements, the SOP does make it clear that the lender must obtain evidence from the borrower of all licenses required to operate the business within 90 days after final disbursement of the loan. Moreover, the SOP further clarifies that the loan may not be sold into the secondary market until all required licenses have been obtained. The purpose of this article is to provide an overview about what is a business license and the consequences for failure to obtain same.

A business license is a special permit issued by a government branch that allows the borrower to lawfully operate its business within a specific jurisdiction. Oftentimes, there may be several licenses, permits, registrations and ancillary certifications required to conduct a business from a single location. Depending on the type of business, the jurisdiction, and the geographical location of the borrower, it is often necessary to obtain multiple licenses from multiple government agencies spanning across the combination of county, state, federal, township, and local municipalities. By way of example, some jurisdictions have general license requirements and occupational (or professional) license requirements. A general business license may be needed regardless of the type of business. While an occupational license is a permit that’s specific to what the business actually does (e.g., daycare, auto repair, construction, hair salon, medical, liquor store, etc.). Moreover, if the borrower’s business is engaged in selling manufactured products to consumers, such business activity may be subject to sales and use tax, requiring a sales and use tax license. Just about every business, from large to small, must keep up with these license requirements in order to comply with jurisdictional tax and public safety regulations.

There are risks for businesses that haven’t been complying or keeping up with their business license requirements. Since each jurisdiction may impose its own penalties, the consequences for borrower’s failure to comply with statutory license requirements can range from a simple fine to a more extreme penalty such as complete shutdown of the business.

Regardless of the type of business, it’s vital for the borrower to obtain and keep up with business licensing requirements. As outlined above, by doing so, the borrower avoids preventable penalties, helps maintain its standing in its industry, and keeps the business operational, which is crucial to generate cashflow and keep the lights on. For information on SBA lending requirements please contact the attorneys at Starfield & Smith, P.C. at  info@starfieldsmith.com.