Small Business Investment Companies Explainedby
Q: I'm hearing more about SBICs as a way for small businesses to get outside investment. How do they help private companies?
A: Your question is a timely one. Small business investment companies provided $1.59 billion to small businesses in 2010, the highest single-year volume in the program's 52-year history, according to the U.S. Small Business Administration. SBICs are for-profit venture capital firms, privately owned and managed but licensed and regulated by the SBA.
The SBIC program was started in 1958 to make capital investments in U.S.-based small businesses. Companies with tangible net worth of $18 million or less and average net profits of less than $6 million over the previous two years are eligible for SBIC investment. Funding from SBICs boomed in fiscal year 2010, increasing 23 percent over the previous four years.
The increase stemmed partly from changes to the program made by the economic stimulus package, formally known as the American Recovery & Reinvestment Act of 2009. The law encouraged formation of new funds and shortened processing times for new licenses. Also in the 2010 fiscal year, SBICs attracted record funding from both the SBA and private capital sources. SBICs are considered precursors to today's private venture capital industry. They were established to encourage investment in innovative small businesses at the start of the space-race era. SBICs generally invest between $250,000 and $5 million, according to the National Association of Small Business Investment Companies, a trade group. The regulation ensures that SBICs invest in businesses, primarily based in the U.S., that are engaged in productive enterprises—not vehicles for financial or real estate investment, for example.
Although they often do not possess the high profiles of well-known venture capital firms, more than 300 SBICs are in the U.S., with more than $16 billion in capital under management, according to the SBA. This online tally of licensees lists contact information, investment criteria, and what type of funding each SBIC provides—they make both loans and equity investments.
Approach an SBIC as you would any private investment group: with a promising business that has high growth potential, a strong management team, and a solid business plan. More information and guidance can be found at the National Association of Small Business Investment Companies, and the SBA website.