Small Business Investment Companies (SBICs) were created by Congress in the late 1950s to help small and lower middle-market businesses access capital. Now over 55 years later, 300 SBIC funds have billions of dollars to employ, but many bankers and business owners don’t know about these very attractive sources of capital for growing businesses.
SBIC Funds Are Chartered by the SBA
SBIC funds must raise private equity to provide capital to their investments, but they have SBA guarantees that protect investors in one of 300 separate funds. The process to set up an SBIC is long and involved, much like chartering a new bank.
Businesses that use SBIC funds for subordinated debt and equity have separate sets of rules than SBA guaranteed loans like the SBA 7(a) or 504 loans, two widely-used loan programs. Companies that receive SBIC investments are normally much larger and can be more creative than standard SBA loans.
SBIC Funds--Geographic or Industry Focus
Each SBIC fund receives a charter by the SBA to headquarter in a particular state; SBICs may also elect to operate in a regional area of the country. SBIC funds also are highly regulated in order to protect small and middle-market businesses from unreasonable rules and requirements.
SBIC funds can help small and mid-sized companies through:
- Early stage equity. Funds that invest equity into small businesses, making investments that allow entrepreneurs with great ideas to commercialize their ideas and give up minimal equity.
- Senior lending. Senior loans to creditworthy, established companies.
- Subordinated debt. Loans to companies needing growth capital. (Subordinated debt is called “growth capital.”) Subordinated debt" means the SBIC agrees to have less security in the business collateral in favor of a senior lender (typically a bank).
- Mezzanine debt/capital. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. It is used when a company is cash flow positive but has high growth opportunities.
- Turnaround capital. SBIC funds can elect to make debt or equity investments into businesses that have experienced non-operational events that create financial difficulties. When an SBIC fund believes a company can turn around, it may invest or make a loan to help it return to profitability.
- Growth capital. Enterprises that have very steep growth rates often cannot fund their growth from profits; growth capital helps a business dramatically increase profitable growth.
- Leveraged/management buyouts. When a company is in ownership transition, SBIC funds can step in and provide some or all of the capital necessary to make the transition occur.
Examples of major companies that started with SBIC investments:
SBIC funds have helped many successful companies start and grow.
SBICs have a great deal of flexibility about the types of investments they make as long as they follow their charter that outlines their investment plans. These funds also are highly preferred over venture capital and private non-regulated equity.
Finding an SBIC That Fits Your Company Can Be Difficult
SBIC funds naturally tend to focus on vertical markets they feel comfortable with providing capital. For example, while some focus on oil and gas service company investments, most shy away from that industry since they don’t have the expertise to manage that type of loan/investment.
Some SBIC funds are extremely focused. For example, at one time there was an SBIC that focused 80 percent of its investments in businesses that created material science technology, such as adhesives, coatings, polymers, and carbon fiber. That particular fund probably would not have been interested in working with companies not in the material science space.
