What is a Small Business Investment Company (SBIC)?
An SBIC is a small business investment company licensed by the U.S. Small Business Administration (SBA). SBICs are privately organized and privately managed profit motivated investment firms which, with their own capital and with funds obtained through the Federal Government, provide capital to small, independently owned and operated businesses.
The SBIC Program
In 1958, Congress created the Small Business Investment Company (SBIC) program. SBICs are participants in a vital partnership between government and the private sector economy. With a combination of private capital and debenture leverage (described in more detail below), SBICs provide capital to small independent businesses, both new and established. By investing in American small businesses, SBICs have the exciting opportunity to share in the success of the small business as it grows and prospers.
Advantages of Being an SBIC
Debenture SBICs (described further here) have access to debenture leverage at favorable rates from the Federal Government based on a multiple of a fund’s private Regulatory Capital approved by the SBA. Interest is payable on these debentures semi-annually and, from 2010 through 2014, has ranged between 41 and 92 basis points in excess of the interest rate on 10-year Treasury Notes.
All SBICs have access to an additional source of capital unavailable to other private funds, as banks and Federal savings associations (and their holding companies) are permitted to invest as limited partners in SBICs and can receive Community Reinvestment Act (CRA) credit for their investments.
To learn more about the SBA’s SBIC program, visit https://www.sba.gov/document/support–sbic-program-overview.
The process for obtaining a license to operate as an SBIC consists of the submission of a “Management Assessment Questionnaire”, which is an initial application outlining a fund’s business plan, and then, if invited by the SBA to continue with the process, the submission of a formal license application. The process is detailed further here.
Before a fund can submit its formal license application, it must have commitments for a level of capital sufficient to enable it to execute its business plan. SBIC regulations require a Debenture SBIC to raise a minimum of $5 million in capital before a fund can submit its license application, but the SBA could require a minimum of $20 million or more at the time the license application is filed.
Types of Investments
SBICs must invest only in “small businesses”, defined as companies with net worths of $19.5 million or less and average net income after-taxes of $6.5 million or less for the prior two fiscal years. SBICs must invest at least 25 percent of financings in “smaller enterprises” that have a tangible net worth of less than $6 million and average net income after-taxes for the prior two years no greater than $2 million. Even if a company does not meet these tests, it still may qualify as a small business and smaller enterprise depending on the company’s industry group and the number of its employees or size of annual revenues.