Filed under Start Up
by Getting Bigger | May 25, 2012
We've been very fortunate and our little company is growing by leaps and bounds. In order to finance this growth, it's been suggested that we investigate getting capital from an SBIC. Can you tell us something about SBICs?
Our federal government sponsors its own public venture capital organization through the Small Business Investment Corporation (SBIC) program, and it's a very good source indeed.
An SBIC is a privately owned and operated small business investment company that partners with the federal government to provide venture capital to small business. Using a combination of private funds and funds borrowed from the federal government, the SBICs provide three important things to eligible small businesses; equity capital, long-term loans (up to 20 years, with a possible 10-year extension), and management assistance.
Like a venture capital firm, an SBIC is most commonly a source of financing for a fast-growing, existing business such as yours (rather than a startup) that needs a substantial amount of financing to keep up with its rapid expansion.
An SBIC must be federally licensed; however, almost anyone or any entity can be an SBIC owner if they have the minimum initial private capital of $5 million and an SBA-approved full-time manager. Every SBIC is subject to annual financial reporting requirements and onsite compliance examinations by the SBA. Regulations control investment approvals as well as operating procedures, and an SBIC is not permitted to control any small business on a permanent basis.
Most SBICs are owned by small groups of local investors, although commercial banks are often also owners. Loans and securities for fewer than five years are unusual and the cost of money on loans and debt securities is regulated by the federal Small Business Administration.
SBICs operate like venture capital firms, although they may be more flexible in the terms of their investment arrangements. The SBIC may want to make an equity investment or may be interested simply in long-term lending on a fully secured basis. One of the advantages of dealing with an SBIC is that they are able to do debt and equity funding at the same time. The ability to obtain this combination from a single source is often a great benefit for a growing firm.
Another advantage of dealing with an SBIC is that these organizations often specialize in certain industries, affording the borrowing firm a wealth of experienced guidance and advice. In addition, SBICs will often defer loan payments in the early stages of the debt in order to free up cash flow at a time of critical growth for the borrowing firm.
Recently, the SBA created a second category of government-operated small business investment companies, the Specialized Small Business Investment Company ("SSBIC"). Currently there are about 100 active SSBICs. They generally operate in the same manner as SBICs, but they can obtain additional government financial assistance by investing in, or loaning to, small businesses owned by people who are socially or economically disadvantaged. These entities are sometimes referred to as MESBICs (Minority Enterprise SBICs.)
The SBA has offices located throughout the country and the agency staff will help you locate the nearest SBIC.