Small Business Investment Corporation (SBIC)

What is a Small Business Investment Company (SBIC)?

A Small Business Investment Corporation (SBIC) is a private investment company licensed by the Small Business Administration (SBA). Small Business Investment Corporation provides equity and debt financing to small companies. For many small businesses seeking start-up capital, they offer a viable alternative to venture capital firms.

key takeaways

  • Small Business Investment Corporations (SBICs) offer unique financing options for small businesses and start-ups.
  • SBICs are generally more forgiving and offer better terms than traditional banks and lenders.
  • Bonds are used to set interest and repayment terms, with a standard repayment term of 10 years.

How Small Business Investment Corporations (SBICs) Work

Because of the loan guarantees provided by the SBA, Small Business Investment Corporations use the funds they raise as well as funds borrowed at preferential rates to provide capital to small businesses. The SBA does not make direct investments in small businesses. Its role is to help SBIC gain leverage by guaranteeing its loan obligations (called bonds).

SBIC requirements

SBICs must pay lenders a 1% commitment fee up front and a 2% withdrawal fee upon issuance. There is also a semi-annual variable fee of about 1%.Investments in project finance, real estate or passive entities such as non-commercial partnerships or trusts are generally not permitted.Proceeds from standard bonds can only be used to invest in small businesses, according to regulations and parameters defined by the SBA’s Office of Size and Standards.

The number of entrepreneurs and small business startups is increasing every year, making small business investing in companies more important than ever.

Bonds are either standard or discounted. There are two types of discount bonds: low-to-middle income (LMI) and energy saving. Discount bonds enjoy favorable repayment and interest terms compared to standard bonds. Under the LMI bond, SBICs must invest in small businesses where at least 50% of their employees or assets are located in low- and moderate-income areas, or 35% of their full-time employees live in LMI areas. Under the energy efficiency bond, the proceeds must be used to invest in a business focused on reducing non-renewable energy.

special attention items

Congress established the Small Business Investment Corporation program in 1958 to provide small businesses with another route to long-term capital. After the SBIC is licensed and approved, the SBA will commit it to a certain amount of leverage over several years.

Once the fund is established, debt securities called bonds will be issued as investments are made. The holder of that bond is then entitled to the principal and interest over time. This is one of the most commonly chosen forms of long-term or medium-term debt.

Standard bonds have a tenor of 10 years or more and an amount equal to or less than twice the private capital committed to the fund. In some cases, the SBA will allow bonds below three times the committed private capital, but only for licensees who have previously managed more than one fund. SBICs may be permitted to use up to a maximum of $175 million for a single fund and up to $350 million for multiple funds.

READ ALSO:   Analysis paralysis
Share your love