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Small Business Investment
In order to facilitate a steady stream of long-term capital to the many American small business concerns, the US Congress implemented the Small Business Investment Company (SBIC) program in 1958. Even though the SBA or Small Business Administration does not directly provide funding to businesses, the organization will partner with private investors in order to capitalize on investment funds that are professionally managed for financing smaller businesses commonly known as “SBIC’s.”
The Small Business Investment Company program (SBICP) is a multi-billion dollar program and is one of the SBA’s many financial assistance offerings. These are structured uniquely in that they are investment funds that are privately managed and owned while being licensed and managed by the SBA. Additionally, SBIC’s make debt and equity investments in small businesses by using their own capital along with borrowed funds backed with an SBA guarantee.
Although the SBA does not directly invest in small businesses through this program, it does provide funding to certain investment management companies that are experts in certain industry niches and sectors as well as qualified to do so. The following content contains information regarding the SBIC program including advantages of SBIC’s, benefits for smaller businesses, and investment fund participation.
Investing in SBIC’s has several advantages and provides benefits to limited partners (LP’s) of SBIC licensed funds. Other types of investment funds do not have access to:
- Credits for community re-investment activities – certain SBIC investments may meet eligibility requirements for receiving Community Reinvestment Act credits.
- Flexible structuring of funds – SBIC’s are allowed to organize or structure themselves as drop-down vehicles, side-car vehicles, or stand-alone entities.
- Rapid fund deployment – the SBA is committed to providing a 2 or 3 to 1 leverage of privately raised capital. This enables fund managers to focus on investments by minimizing the amount of time spent on their fundraising efforts.
- Regulatory benefits – no registration is required with the SEC (Securities and Exchange Commission) so there is no major compliance and regulatory burden. The benefit to the LP is that the risk of abuse and fraud is greatly reduced.
- Small business opportunities – the smaller businesses in the US are still underserved despite being the foundation of our economy and the opportunity values that they represent for many investors.
- Stable, strong ROI’s – fund managers are provided with flexible pricing across cycles based on lowered SBA capital expenses. At the same time, the 10-year terms of SBA debentures are able to avoid any duration mismatch problems that may arise.
The US Government allows SBIC’s to borrow additional funds in order to increase the amount of private investor funding. SBIC’s are usually focused on investments ranging from $100,000 to $250,000 and are more forgiving in their underwriting requirements compared to venture capital firms.