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Small Business Investment Company (SBIC) Program
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Posted On: Monday December 29th, 2003 at 12:00am EST
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What is government backed equity financing?
SBA’s Small Business Investment Company (SBIC) Program provides long-term loans and/or venture capital to small firms. SBICs are privately-owned investment companies which are licensed and regulated by SBA. Because money for venture or risk investments is difficult for small firms to obtain, SBA provides financial assistance to SBICs to stimulate and supplement the flow of private equity and long-term loan funds to small companies. Venture capitalists participate in the SBIC program to supplement their own private capital with funds borrowed at favorable rates through SBA’s guarantee of SBIC debentures, which are sold to private investors.
SBICs offer alternative low capitalization solutions.
An SBIC’s success is linked to the growth and profitability of the companies which it finances; as a result, some SBIC’s primarily assist businesses with significant growth potential, such as new firms in innovative industries. SBICs finance small firms by providing straight loans and/or equity-type investments which often give them partial ownership of those businesses in the hope of sharing in the companies’ profits as they grow and prosper.
The following types of investments are commonly used by SBICs:
Loans with Warrants – SBICs may make loans in return for warrants which enable them to purchase common stock, usually at a favorable price, during a specific period of time.
Convertible Debentures – SBICs may make loans with a conversion feature whereby the debenture can be converted , at the SBIC’s option, into an equivalent amount of common stock.
Stock – SBICs may purchase common or preferred stock from the business.
Some SBICs also provide management assistance to the companies they finance to foster growth.
Who is eligible?
Typically, small businesses with a net worth not exceeding $6 million and average annual net profits after taxes over the past two years not exceeding $2 million, or which qualify under SBA’s size standards.
What kind of terms am I looking at?
The terms of investment are negotiated by the SBIC and the small business concern. Generally financings are for at least five years.
What kind of interest rate can I get?
Interest rates on SBIC loans are limited by SBA regulations and depend upon the security offered and the business’ earnings; and are negotiated between the SBIC and the small business, subject to the legal ceiling (if any) of the State in which the SBIC is organized.
Where do I get started and what steps do I take?
Firms interested in raising venture capital can go to the SBA web site for a master list. All firms interested in venture capital should investigate and perform due diligence prior to negotiating any funding both debt and/or venture. Typical points of interest are – what types of financing they provide, what types of businesses the SBIC invests in (they have different focuses), how much money is available, and what management assistance (if any) is available.
What should I do prior to talking with a SBIC?
Most SBICs will require, at a minimum, a business plan with historical and current financial statements to evaluate any proposal for financing.
What if my business is new/start-up?
Again, a business plan should be presented supported by projected financial statements.
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SOURCES
“Loan Officer’s Training Guide, SOP 5011- SBIC Program,” US Small Business Administration, Associate Administrator for Finance and Investment, January 16, 1988, pp.5-6. - May 18th, 2001
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