What Is a Small Business Investment Company (SBIC)?
A small business investment company (SBIC) is a type of privately-owned investment company that is licensed by the Small Business Administration (SBA). Small business investment companies supply small businesses with financing in both the equity and debt arenas. They provide a viable alternative to venture capital firms for many small enterprises seeking startup capital.
- Small Business Investment Companies (SBIC) provide small businesses and startups with unique financing options.
- SBIC’s are typically more forgiving and offer better terms than traditional banks and lenders.
- Debentures are used to lay out the terms of the interest and repayment, with a standard repayment term of 10 years.
How a Small Business Investment Company (SBIC) Works
Small business investment companies are allowed to borrow from the federal government in order to augment the funds of private investors. An SBIC usually focuses on investments in the $100,000 to $250,000 range, and tend to be considerably more forgiving than venture capital firms in their underwriting requirements. The Small Business Administration typically matches the investment at a rate of $2 for every $1 investor put into a small business investment company.
Requirements for an SBIC
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%. 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. Investments are typically not permitted for project finance, real estate, or passive entities such as a nonbusiness partnership or trust.
The number of entrepreneurs and small business startups grows larger each year, making Small Business Investment Companies are more important than ever before.
There are more than ten different types of debentures, but there are five that are used more commonly than the others: secured debentures, perpetual or irredeemable, redeemable, registered, and bearer. Qualified SBICs may issue discounted debentures that have the same face value as a standard debenture but are offered at a discount and must be invested in small businesses that are either located in low-to-moderate income areas or the business is engaged in qualifying energy-savings activities as defined by the SBA.
Congress established the Small Business Investment Company program in 1958 in order to create another pathway for long-term capital to be made accessible to small businesses. After an SBIC is licensed and approved, the SBA will provide it with a commitment to provide a set amount of leverage over several years.
Once this fund is established, a debt security called a debenture will be 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 ten years or more, and it is available as an amount equal to or less than two times the private capital committed to the fund. In some cases, the SBA will allow the debenture to be less than three times the committed private capital, but only for those licensees who have previously managed more than one fund. The upper limit that SBICs may be granted access to is a maximum of $150 million for a single fund and $225 million for multiple funds.