What Is a Small Business Investment Company (SB🐓IC)?

A small business investment company (SBIC) is a type of privately owned investment company licensed and regulated by the Small Business Administration (SBA). Small business investment companies supply small companies with equity and debt financing, which is funded with their own capital and money borrowed from the SBA. They provide a viable alternative to venture capital firms for many small enterprises seeking capital, including money for startups.

Hoꦕw a Sma✅ll Business Investment Company (SBIC) Works

Small business investment companies supply money to 澳洲幸运5官方开奖结果体彩网:small businesses from their capital reserves along with funds borrowed from the SBA. These loans are given to SBICs at favorable rates. The SBA does not make direct investments in small businesses. Rather, its role is to help SBICs obtain leverage by guaranteeing their loan obligations, called debentures.

Congress established the SBIC program in 1958 to create another pathway for long-term capital to be made accessible to small businesses. After an SBIC is licensed and approved, the SBA provides it with a commitment to provide a set amount of leverage over several years.

Once this fund is established, a debt security called a 澳洲幸运5官方开奖结果体彩网:debenture is issued when an investment is to be made. The holder of that debenture is then entitled to principal payments and interest over time. This is one of the most commonly chosen long or medium-term debt formats. 

The standard debenture has a term of 10 years or more and is available as an amount equal to or less than two times the private capital committed to the fund. In some cases, the SBA allows the debenture to be less than three times the committed private capital, but only for licensees who previously managed more than one fund. The upper limit that SBICs may be granted access to is a maximum of $175 million for a single fund and $350 million for multiple funds.

What Small Business Investment Cဣompanies (SBICs) Pr🐈ovide

As noted above, SBICs can offer small businesses debt and equity financing as well as debt with equity:

• Debt: Loans typically range between $250,000 and $1 million. Interest rates start from 9% and can go as high as 16%.
• Equity: SBIC equity investments can go from $100,000 to $5 million in exchange for a stake in the business.
• Debt with equity: SBICs can provide this combination from $250,000 to $5 million. Interest rates on the debt portion range between 10% and 14%.

Requirements for a Small Business 𓆉Investment Comp🦂any (SBIC)

SBICs must follow reporting regulations, which include quarterly and annual reporting as well as portfolio financing reports. There is a commitment fee of 1% that the SBIC must pay to the lender upfront, as well as a 2% drawdown fee at the time of issuance. There is also a semiannual, variable charge of about 1%.

Investments are typically not permitted for project finance, real estate, or passive entities such as a nonbusiness partnership or trust. The proceeds from a standard debenture can only be used to invest in small businesses per the regulations and parameters defined by the SBA's Office of Size and Standards.

Debentures are either standard or discounted. The discounted debenture enjoys preferential payment and interest terms compared with the standard debenture. Discounted debentures fall into two different categories: low-to-moderate income and energy saving:

• Under the LMI debenture, SBICs must make investments in small businesses that have at least 50% of employees or assets in low-to-moderate income zones, or in which 35% of full-time employees live in an LMI zone.
• Under the energy-saving debenture, the proceeds must be used to invest in a business focused on the reduction of nonrenewable energy.
  

Small Business Investment Company (SBIC) vs. ꦗPrivate Equity

There are some similarities between SBICs and 澳洲幸运5官方开奖结果体彩网:private equity firms. Both of thesꦏe entities provide debt and eq🌺uity financing to businesses and are private companies. But, there are inherent differences between the two.

SBICs are licensed and regulated by the SBA. This means they must follow the rules set forth by the SBA. These include providing funding to small businesses (rather than other larger corporations) and following reporting requirements. Private corporations, on the other hand, aren't heavily scrutinized by the government and can invest in businesses of any size.

Another key difference is the type of investment made. SBICs can loan money, seek equity positions, or do a combination of both. In mo🥃st cases, private equity firms seek equity stakes from the companies in which they invest. This gives them more control and the power to make decisions about how their investments operate.

The Bottom Line

A small business investment company is a privately owned company that provides financing to qualifying small businesses through loans, equity financing, or a combination of both. Unlike private equity, these companies are licensed by the SBA and must follow certain rules and regulations, including reporting requirements. They can be a valuable resource for small business owners who need capital but can't access it through private equity or venture capital firms.