Understanding the Pros and Cons of SBIC Funding

Many entrepreneurs and start up business owners know they can go to the Small Business Administration for help and that the SBA provides a wealth of information, financial services, free business counseling, etc. However the SBA itself does not directly provide grants, loans, or other types of funding. Instead, they contract with private organizations across the nation, such as banks and Small Business Investment Companies (SBICs), who can provide you with start up or expansion money for your new or existing business.

In order to understand what a Small Business Investment Company does, it is important to understand SBA loan guarantees. A loan or investment with an SBA guarantee means that the loan or investment will be repaid, at least in part, with money from the Federal government if the borrower or invested (your business) ends up defaulting on the repayment. The guarantee is a positive, important element because business loans and investments (especially with start ups) are almost always considered to be risky since the outcome of a business is so unpredictable, even when the borrower or invested has excellent credit. The SBA loan guarantee gives a private bank or SBIC the safety net it needs in order to make such investments, allowing small business owners to obtain funding that would otherwise be unavailable.

Since 1959, Small Business Investment Companies (SBICs) have supplied long term loans, equity capital, business guidance, management assistance, assistance in obtaining contracts, and other types of support to qualifying small businesses. They are a coalition of privately managed, for-profit investment firms all over the nation, licensed by the Small Business Administration so that they have access to Federal government money at very low interest rates. They use a combination of their own capital, plus funds borrowed from the Federal government with an SBA guarantee to make equity and debt investments in qualifying small businesses. There are over 400 licensed SBICs now in operation all over the United States. They invest in many different industries. Some SBICs invest in one field or industry in which their management has expertise, while others invest more generally. Most concentrate on a particular stage of investment (i.e. start-up, expansion or turnaround) and also focus on a general geographic area.

A qualifying “small” business, small enough to get help from SBICs, is defined by the SBA as having a net worth of no more than $18 million and its average after tax net income for the prior two years cannot exceed $6 million. All of the company‚Äôs subsidiaries, parent companies, sister companies, affiliates, etc. are considered in determining the size standard. A business exceeding those numbers cannot get funding from SBICs.

Another positive thing about SBICs is that unlike a bank loan, but similar to venture capital, a deal with a Small Business Investment Company can mean a lot more than just receiving money. This is because the SBICs investment professionals will often offer to get involved in your project and offer high quality professional and technical advice and assistance. They will rally around you and contribute to your success as much as possible to make sure they see a good return on their investment. They can even help you obtain government contracts, which can instantly skyrocket the success of a business. In this regard an SBIC can be like a rich business partner who has serious expertise and connections.

There are a number of different ways an SBIC investor can participate in your business. For example, when you make a deal with and SBIC you can give up equity, as in a percentage of ownership, or, you may just end up paying back a low interest, long-term, business loan. However, please note that the SBIC investment pool is intended to target and help business owners who would not normally be able to get financial support from a private bank due to credit factors, nature of the business, assessment of risk, etc. In other words, it’s not as good as getting a grant, which is basically free money. And in some ways it may not be as good as getting an SBA guaranteed bank loan on good terms. But getting help from an SBIC can still be low cost and most importantly it can end up being exactly what you need in order to start or expand your small business. a

You can learn more about Small Business Investment Companies From the SBIC Investment Division of the Small Business Administration.

This entry was posted in Small Business Investment Company. Bookmark the permalink.