Small Business Investment Companies (SBIC) are a network for firms that are in place to provide capital to small businesses. SBICs were first licensed in 1959 and are privately-owned investment company that are licensed by the Small Business Administration (SBA). SBICs supply small businesses with financing in both the equity and debt arenas. There are around 300 SBICs in the United States. An SBIC operates much like a loan service but with more long-term value. An SBIC resembles a Venture Capital fund as well.
By definition, SBICs can only invest in small businesses (tangible net worth under $19.5 million) and 25% must be invested in smaller businesses, which are defined as businesses with tangible net worth of less than $6 million AND an average of $2 million in net income over the previous two years at the time of investment. SBICs invest in qualifying small businesses through loans, debt securities with equity features & equity. Small businesses that are eligible to receive funding through SBICs are those that are active in manufacturing, transportation, consumer products and other sectors that are not contrary to the public interest. Financial intermediaries and businesses involved in real estate are not eligible for funding through SBICs.
According to the SBA, From 2010 through 2014:
- Over $17 billion in financing was invested in small businesses
- Over 5,900 businesses received investments
- 22% of the small businesses financed were located in low-to-moderate income areas
- 8% of the small businesses were women-, minority- or veteran-owned
Here are some essential facts that can help small businesses understand the world of SBICs.
- A pitch to an SBIC firm works just a pitch to any type of investor. You must present your business idea to SBIC in a way that will make them want to fund your venture. It’s good to know about the SBIC before going in. Certain pitches may work better than others. Make sure to have your figures in order as well.
- SBIC financing is tailored to meet the unique needs of each business financed while also ensuring the best use of SBIC funds. SBICs are often interested in generating capital gains, so financing often includes stock purchases or advance funds through a loan with conversion privileges or rights to buy stock at a predetermined later date.
- If the SBIC provides funds in a subordinated position, it will often do double or triple duty. Industry averages show that for every SBIC dollar placed with a small business, two additional senior dollars become available from commercial banks or other sources.
- It is very easy to find an SBIC to fund your company. The SBA has an online directory of SBICs. You can look over each company to see which one is the best for you. SBICs are organized by:
- Preferred Investment Size: The amount the SBIC is willing invest or loan.
- Investment Policy: The type of investment the SBIC is willing to make (for example, loans, equity or debt with equity features).
- Investment Type: The various stages of financing that the SBIC is willing to fund (for example, seed, start-up, early stage, expansion financing, later stage financing, or managed buyout, leveraged buyout or acquisition).
- Industry Preference: Type of industry or industries the SBIC is interested in financing. Usually based on the knowledge and experience of the SBIC’s management.
- Geographic Preference: The area of the United States where the SBIC prefers to make financing.
- Regulatory Capital: A Licensee’s private paid-in capital and surplus or private partners’ contributed capital (excluding non-cash contributions), plus unfunded binding commitments from institutional investors.
- Leverage from SBA: A Licensee’s outstanding debentures, participating securities or preferred stock guaranteed or purchased by SBA.
- Capital Resources: The sum of a Licensee’s regulatory capital and leverage from SBA.
SBICs can be a great way to get your small business off the ground. It can be a safer route for some entrepreneurs. SBICs do have some disadvantages. There is usually a ten-year maturity cap for investments. If it looks like it will take your business longer to mature, then an SBIC is not your best choice. Or if you are an early-stage company who can’t make payments, then you should avoid an SBIC as well. An SBIC is something that should be researched carefully. You have to find the right one that will suit your company’s needs and growth. When you search the directories, you can see what type of business and capital the SBIC favors. An SBIC is a path you might want to consider as a small business owner needed just the right boost.