Small Business Investment Companies, or SBICs are licensed by the U.S. Small Business Administration (SBA), but are privately organized and managed investment firms that use their own capital, plus funds borrowed at favorable rates with an SBA guarantee, to provide venture capital to small independent businesses, both new and established, by way of equity capital, long-term loans, and expert management assistance. Their incentive is the chance to share in the success of the small business as it grows and prospers.
The program makes funding available to all types of manufacturing and service industries. Many investment companies seek out small businesses with new products or services because of the strong growth potential of such firms. Some SBICs specialize in the field in which their management has special knowledge or competency. Most, however, consider a wide variety of investment opportunities.
There are two types of SBICs: regular SBICs and specialized SBICs, also known as SSBICs. Specialized SBICs invest in small businesses owned by entrepreneurs who are socially or economically disadvantaged, mainly members of minority groups.
SBICs are formed by a group of people who have venture capital expertise and at least $5 million in capital, and who want to form a venture capital investment company. By law, an SBIC can be organized in any state, as either a corporation or a limited partnership. Most SBICs are owned by relatively small groups of local investors, however there are many SBICs owned by commercial banks. Bank ownership in an SBIC subsidiary permits banks to invest in small businesses in which they could not have otherwise invested, because of banking laws and regulations. A bank may invest up to 5% of its capital and surplus in a partially or wholly-owned SBIC.
With only a few exceptions, there are no restrictions on the ownership of SBICs. Almost any person or organization with a minimum initial private capitalization of $5 million and an SBA-approved full time manager who will be in charge of the licensee's operations and who is able to serve the licensee's small business concerns may be approved for ownership. A Corporation of limited partnership may apply to the Small Business Administration for a license to operate as a Federal Licensee under the
Small Business Investment Act of 1958, as amended, and the SBIC rules and regulations.In general SBICs invest in small businesses in three ways:
Loans - SBICs can make long-term loans to small business in order to provide them with funds needed for their sound financing, growth, modernization, and expansion. An SBIC may provide loans independently, or in cooperation with other public or private lenders. SBIC loans to small business may be secured, and should be of reasonably sound value. Such a loan may have a maturity of no more than 20 years, although under certain conditions the SBIC may renew or extend a loan's maturity for up to 10 years.
Debt Securities - An SBIC may elect to loan money to a small business in the form of debt securities - loans for which the business issues a security, which may be convertible into or have rights to purchase equity in the small business. These securities may also have special amortization and subordination terms.
Equity Securities - By law, the SBIC must provide equity capital to small businesses, and may do so by purchasing the business equity securities. However, SBICs may not become general partners or otherwise liable for the general obligations of a business. In another word SBICs cannot purchase enough equity to gain controlling interest status.
An SBIC may not invest in any small business classified under Major Group 65 (Real Estate) of the SIC Manual, with the exception of sub-dividers and developers, title abstract companies, real estate agents, brokers, and managers. Investment in real estate related businesses is limited to one third of the SBIC's portfolio, and combined investment in real estate related activities is limited to two thirds of an SBIC's portfolio investments.
SBICs may not provide funds for a small business whose primary business activity involves directly or indirectly providing funds to others, purchasing debt obligations, factoring, or leasing equipment on a long-term basis with no provision for maintenance or repair.
To locate the Small Business Investment Companies in your area, select your state from the list below. Each SBIC profile will tell you what kind of projects they like to fund, typical financing amounts, and how much money is available.