What Is a Small Business Investment Company (SBIC)?

KEY TAKEAWAYS

• Small Business Investment Companies (SBIC) help to provide unique financing opportunities to small businesses and startups.
• They will commonly offer better and more forgiving terms than traditional lenders and banks. 
• Debentures are used when laying out the terms of the repayment and interest agreement. 
• The standard repayment term is 10 years. 

What Is a Small Business Investment Company (SBIC)?

A small business investment company (SBIC) is a privately managed and owned investment fund. A Small Business Administration (SBA)-licensed, SBA-backed small business investment firm is a privately owned and managed investment vehicle. To make equity and capital investments in small businesses, SBICs use a combination of money obtained from private sources and money raised through the utilization of SBA guarantees. SBA funds are matched by SBIC funds at a ratio of $2 for every $1 invested by SBIC.

SBICs work by offering venture capital funding to small businesses. 

How Does a Small Business Investment Company Work?

Small business investment companies work by supplying small businesses with money. This is done using the capital that they have raised along with any funds that they’ve borrowed at favorable rates. This tends to be thanks to loan guarantees that are provided by the SBA.

The SBA doesn’t make direct capital investments in small businesses. Instead, its role is to help SBICs obtain leverage. This is done by guaranteeing their loan obligations, these are known as debentures. 

There are two types of debenture: 

• Standard debenture
• Discounted debenture

There are then a further two types of discounted debenture:

• Low-to-moderate income (LMI) debenture
• Energy saving debenture

Purpose of a Small Business Investment Company (SBIC)

An SBIC provides capital to small business investment firms with specialized expertise in a given field or industry. These investment firms then make an investment in a promising small business using the SBA cash as well as their own capital.

An SBIC can provide a small business with capital using a number of different investment methods. These are typically either through debt, equity, or a combination of the two. 

Steps to Finding a Small Business Investment Company

If you’re looking to find a small business investment company to help with your business growth potential, the SBA has some recommended steps:

1. Research possible investment opportunities: When looking for SBICs, look for ones where their investment goals fit with your business plan. It’s also important to make sure that the SBIC is actually looking for investment opportunities. 

The best place to start looking first is in your state. Many typical equity investments will be local and looking to support local businesses. 

2. Prepare a pitch: You should never approach a meeting with a potential investor without a plan. Creating a solid, well-thought-out business plan can make a huge difference. 

3. Deliver your pitch: Once you’ve done all of the research and preparation, it’s now time to deliver your pitch. Try and make a personal connection with the investor and show why your business is deserving of investment. 

Requirements for a Small Business Investment Companies

The SBIC has to pay the Lender an upfront commitment fee of 1% and a drawdown fee of 2% at the time of issuance. Additionally, there is a semiannual, changeable fee of roughly 1%.

Real estate, project finance, or passive businesses like non-profit partnerships or trusts are frequently not eligible for investments. According to the rules and restrictions established by the SBA’s Office of Size and Standards, proceeds from a standard debenture can only be used to finance investments in small firms.

Summary

SBICs are a great way for small businesses to raise venture capital financing and kickstart their journey in a range of industries. It is always a sound financing option for small business owners who are looking for private equity capital and investment funds. 

If you are looking for financial assistance for your small business, make sure that you have done your research. It’s important that you understand exactly what you need for your business operations. Having an adequate supply and full access to capital is a vital part of running a small business. So having these types of investments can be a game changer.