Filed under Finance
by Getting Bigger | October 28, 2011
Despite recent tough times 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? And is it really possible to get financing during this difficult recession period?
Dear Getting Bigger,
That was a good suggestion you got. Small businesses that might otherwise have difficulty securing private equity or venture capital may find it easier to get due to changes made as part of the American Recovery and Reinvestment Act (ARRA) to the U.S. Small Business Administration's Small Business Investment Company (SBIC) program.
Our federal government has for some years sponsored its own public venture capital organization through the Small Business Investment Co. (SBIC) program, and it's a very good source indeed. Currently there are approximately 338 SBICs with $17.4 billion in capital under management.
The Recovery Act makes SBICs eligible for greater SBA guaranteed funding and requires SBICs to invest 25 percent of their investment dollars into "smaller" businesses. Also, the amount of funding an SBIC may invest in a single small business is set at 10 percent of an SBIC's total capital rather than the previous limit of 20 percent of an SBIC's private capital only. This translates to an effective 50 percent increase in funding available to a single business by an SBIC.
Maximum SBA funding levels to SBICs will increase up to three times the private capital raised by the SBIC, up to a maximum of $150 million for single SBICs, or up to $225 million for multiple SBICs that are under common control. The cap for all licensees was previously set at $137.1 million before the Recovery Act.
The new limits are even higher for SBICs that are licensed after October 1, 2009, and that certify that at least 50 percent of their investments will be made in small businesses located in low-income areas. Changes made to the SBIC program under the Recovery Act are permanent.
As for the basic 411, 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 via guarantees by the federal government under the SBA, the SBICs provide three important things to eligible small businesses; (1)equity capital, (2)long-term loans and (3) 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.
Current SBICs in your area can be found at this directory site. Some of the directory listings are more detailed than others. Ideally the individual SBICs should provide their contact name and address, the amounts they will loan or invest, their industry and geographic preferences and capitalization information.
Since the SBIC program's formation in 1958 up through April 2009, it has invested approximately $56 billion in more than 106,000 small businesses in the U.S. Be sure to take a look at the very good NASBIC financing site and access the SBA's SBIC site for further details.