The Small Business Investment Company Program: Who Does It Benefit Is Continued Federal Participation Warranted
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The Small Business Investment Company program was intended to stimulate and supplement the flow of private-equity capital and long-term loans to small businesses for growth, expansion, and modernization. The government makes long-term loans to SBICs which are regulated and licensed by the Small Business Administration , charging interest at approximately its cost of borrowing, about 7 or 8 percent.
Contact Businesses Or Schools In Your Field Of Work
Chances are, you already know people in a similar line of work as yours. Perhaps you can connect with them to see if they have any recommendations on who may be interested in investing in your company.
This research process might take up quite a bit of your time, as youre unlikely to find someone willing to invest, from just one phone call. In fact, you may have to call a lot of people or even attend industry events to network. But, if you keep digging, you just might be introduced to that certain someone who likes your business plan or product enough to invest in it.
Barring that, schools that offer certificates, diplomas or degrees in your field are also a possible way to reach potential investors. This is because often the professors who teach the programs invite guests in to speak on certain subjects. Typically, these guests are experts in their field. Perhaps you can see if the professors or someone in the department will reach out to these guests on your behalf, to set up an introduction.
How Does A Small Business Investment Company Work
The Small Business Administration provides funding to small business investment companies with particular knowledge of an industry or sector. Those investment companies, in turn, use that SBA funding plus their own money to invest in a promising small business.
An SBIC can provide capital to a small business using a few different methods:
- Debt: The company may issue a loan to the small business in exchange for interest. A typical SBIC loan ranges from $250,000 to $10 million, with an interest rate between 9% and 16%.
- Equity: Some SBIC funding is in the form of equity or ownership in a business. In those arrangements, an SBIC may decide to invest in your business in exchange for a share of ownership in your company. Typical equity investments range from $100,000 to $5 million.
- Combination: Other investments may involve a combination of debt and equity financing, typically with rates between 10% and 14%, and loan amounts up to $10 million.
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The Two Types Of Sbic
There are two types of SBIC, leveraged and non-leveraged. The differences between the two are as follows:
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Leveraged SBIC funds consist of private capital combined with money available through the SBIC credit facility. If an SBIC has managed to raise $50 million then it will be able to access as much as $100 million in SBIC leverage, on condition that the $150 million total is then invested in US small businesses.
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Non-leveraged funds can provide more funding to small businesses because the SBIC doesnt charge interest on the money borrowed.
We can help
If youre interested in finding out more about small business investment companies, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.
Borrowing From An Sbic
“As is true with venture capitalists in general, SBICs have divergent philosophies and operating policies,” wrote Art DeThomas in Financing Your Small Business. “Some specialize in equity financing while others provide debt financing in several different forms. This latter group of SBICs is the richest source of debt financing for small businesses outside commercial banks.” Small business owners, however, need to weigh several factors before making a loan arrangement with an SBIC.
Entrepreneurs and small business owners seeking financing from SBICs first need to determine how many options they have. Regional SBA offices maintain information on SBICs that operate in their areas, and while they do not provide guidance in directing businesses to particular SBICs, they can give information on the industries and types of investments in which area SBICs have historically shown interest. In addition, a free directory of SBICs is available through the National Association of SBICs.
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An Overview Of The Small Business Investment Company Program
This article was edited and reviewed by FindLaw Attorney Writers| Last updated March 26, 2008
There are two principal reasons for a firm to become licensed as an SBIC — access to SBA guaranteed financing and, for banks, the ability to own indirectly more than 5 percent of the voting stock of a small business and receive Community Reinvestment Act credit.
This memorandum provides a summary description of the two kinds of SBA Leverage and a general overview of other SBA regulations.
Historical Perspective
From the summer of 1994 through September 30, 1999, 187 SBICs were licensed. As of October 1, 1999, 91 SBICs had been licensed to use Participating Securities with aggregate private capital of $1.7 billion and 91 SBICs were licensed to use Debentures . There also were 99 bank-owned SBICs with private capital of $5.4 billion and 66 “specialized” SBICs with $154 million in private capital. SBA anticipates that over 60 new SBICs will be licensed by September 30, 2000. As of October 1, 1999, the 91 SBICs using Participating Securities had approximately $2.3 billion of outstanding Leverage commitments and the 91 SBICs using Debentures had outstanding Leverage commitments of $1.2 billion .
SBA Leverage
In addition, SBA has issued final regulations authorizing the creation of “LMI Debentures” for use by SBICs making investments in Low and Moderate Income Zones which are more fully described below under the heading “LMI Investments”.
Leverage Availability
Requesting Leverage
What Is An Sbic
Last editedNov 2021 2 min read
Small business investment companies provide small businesses with debt financing and equity, filling the role often taken by venture capital firms. A small business investment company is privately owned and licensed by the Small Business Administration . If an entrepreneur is seeking startup capital then an SBIC will often be the simplest and most effective means of obtaining the funds needed.
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Two Types Of Small Business Investment Company
There are two types of a small business investment company , which are:
Leveraged SBIC
Leveraged SBIC combines private money with funds made available under the SBIC credit facility.
when an SBIC obtains $50 million, it can access up to $100 million in SBIC leverage if the remaining $150 million is invested in small firms in the United States.
Non-leveraged SBIC
Because the SBIC does not charge interest on the money borrowed, non-leveraged funds can give additional funding to small firms.
Ask Family Or Friends For Capital
This may be the easiest and most cost-effective way of raising money for your startup. Talk to your family and friends about your businesss needs. Decide if you just want a loan from them, or if you want investment funds. A loan may be easiest for both parties – you just pay it back over time, with interest.
An investment means family or friends would hold a stake in your company, and share the risks with you. However, with an investment, you might be able to get more money upfront, and unlike a loan, you will not be paying it back in installments. Investors will get money only if your business becomes profitable.
But dont be too casual about the way you approach this with family or friends, or assume that its a done deal just because you know these people. Do a proper pitch and let them know when they can expect to make their money back. If theyre investors, explain the risks.
There is a downside to family and friends who become investors, as you are mixing business with pleasure. If the business fails, and their money is lost, the relationship may be strained, forever.
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The Loans Made By Small Business Investment Company
SBIC loans are called debentures and can be standard or discounted. A discounted debenture, as the name implies, provides better payment conditions and an interest rate than a conventional debenture.
The reduced debentures are available in two forms:
What Market Capitalization Means
The market cap of a company often says something about the quality of the business underlying the stock as well as how the stock tends to trade.
Large-caps are typically known for being stable companies with robust balance sheets. These companies typically show less volatility during market downturns than their mid-and small-cap counterparts.
Companies with large market capitalizations are some of the biggest companies in business. Companies such as Apple , Microsoft , Alphabet , Amazon and Berkshire Hathaway occupy the large-cap market. Large-cap companies often have reputations for producing quality goods, showing steady growth and are often dominant players within established industries.
In economic downturns, large-cap companies have historically outperformed relative to their small- and mid-cap counterparts, primarily because they represent more established companies with stronger balance sheets, says Mark Andraos, associate portfolio manager at Regency Wealth Management in New York.
Smaller companies on the other hand can be a mixed bag. While smaller companies may have more room for growth than large-cap companies, their less established position within their industry and generally weaker balance sheets mean investing in these companies comes with more risk but also more potential return if they succeed.
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Requirement For A Small Business Investment Company
Before acquiring SBIC finance, first, you should pinpoint and examine existing SBICs that may be concerned or interested in funding your company.
Make use of the SIBC directory this should be your first step in learning as much as possible about Small business investment company in your location or area thats important to your companys demand. When choosing an SBIC, put into consideration the type of investment it makes, and what amount is available for investment.
The SBIC must pay an upfront commitment charge of 1% to the lender, as well as a drawdown cost of 2% at the time of issue. There is also a semiannual, changeable fee of roughly 1%.
Investments in project finance, real estate, or passive entities such as a nonbusiness partnership or trust are often not permitted. The proceeds of a standard debenture can only be utilized to invest in small firms following the restrictions and parameters established by the SBAs Office of Size and Standards.
Classifications of an SBIC Debenture
Debentures are classified as either standard or discounted. Discounted debentures are classified into low-to-moderate income and energy-saving.
The discounted debenture provides more advantageous interest and payment terms than the standard debenture. Under the LMI debenture, SBICs are required to invest in small businesses that have at least 50% of their assets or employees in low-to-moderate income zones, or 35% of their full-time workers reside in an LMI zone.
Small Business Investment Company
The SBA has enacted several laws and policies governing SBIC operating requirements to ensure proper management. The main rules and policies are outlined below.
An SBIC and its partners may give managerial services to small enterprises in whom the SBIC invests, but only at competitive rates.
Unleveraged SBICs must appraise their assets annually following SBA-approved valuation rules. The SBA has issued model valuation rules that are similar to those used by private funds but do not adhere to generally accepted accounting principles.
The ability of an SBIC to borrow cash from external parties is governed by SBA regulations. Although SBICs that use debentures may incur solely unsecured debt, unleveraged SBICs may incur secured debt as well.SBICs must file a variety of reports with the SBA, none of which are overly burdensome.
An annual financial statement certified by the SBICs independent certified public accountants, valuation reports, among other things, changes in regulatory investment, reports on changes in the SBICs management, material litigation, a brief report describing each investment, and copies of reports sent to investors and, if applicable, investors representatives are all included in these reports.
Each SBIC will be subjected to an annual regulatory examination by the SBA. If the SBIC violates SBA regulations, the SBA has specific rights and remedies.
Regulations:
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What Is A Small Business Investment Company
A small business investment company is a type of privately-owned investment company that is licensed by the Small Business Administration . Small business investment companies supply small companies with both equity and debt financing. They provide a viable alternative to venture capital firms for many small enterprises seeking startup capital.
Was Ist Small Business Investment Company
Definition: Das Unternehmen ist von der Abteilung für Small Business Administration lizenziert, die von SBA zur Verfügung gestellten Eigenkapital- und langfristigen Darlehen für kleine Unternehmen bereitgestellt werden. SBIC kann Geld leihen oder Aktien kaufen, Anleihen können in Unternehmen mit weniger als 5 Millionen Vermögenswerten umgerechnet werden, Netto ist nicht mehr als 2 Millionen wert, und das Nettoergebnis nach Steuern überschreitet nicht 250.000 US-Dollar. Zunächst ist der SBIC den Sondersteuermodus von IR, sodass die Anteilinhaber Kreditverluste in das Normaleinkommen entfernt werden können. Die kleine Geschäftsverwaltung koordiniert den Kapitalbeitrag von Anlegern in einem SBIC, der das Anfangskapital um das 4-fache ausleihen darf.
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Equity Investments In Small Businesses
When you make an equity investment in a small business, you are buying an ownership stake, or a “piece of the pie.” Equity investors provide capital, almost always in the form of cash, in exchange for a percentage of the profits .
The business can use this invested cash for a variety of actionscapital expenditures needed for expansion, cash for running daily operations, reducing debt, or hiring new employees.
In some cases, the percentage of the business the investor receives is proportional to the total capital they provide. For example, if you invest $100,000 in cash and other investors put in $900,000, you might expect 10% of any profits or losses because you provided 1/10th of the equity.
In other cases, the percentage of ownership and dividends can differ. Consider the investment partnerships Warren Buffett ran in his 20s and 30s.
He had limited partners contribute nearly all of the capital for his partnerships, but profits were split 75/25 to limited partners, in proportion to their overall share of the capital, despite having put up very little of his own money. The limited partners were fine with this arrangement because Buffett was providing the expertise.
The Small Business Investment Company Program: A Primer
Thomas Wade
Executive Summary
- Over 60 years, the Small Business Administration has provided nearly $70 billion through 166,000 investments to Americas small businesses, including financing for Apple, Intel, and Tesla.
- Licensed Small Business Investment Companies have access to a rapid deployment of funds and a flexible fund structure at generous interest rates in addition to favorable legal treatment under a bevy of laws from Dodd-Frank to the Community Reinvestment Act.
- While comparatively small in scale, the SBIC program is one of the best examples of public-private partnerships, matching government funding with experienced investors solely for the purposes of supporting Americas small businesses.
Context
On March 25, 2020, Congress passed the Phase 3 stimulus package, the Coronavirus Aid, Relief, and Economic Security Act. With an estimated $2 trillion price tag, the third package would be one of the largest and most significant stimulus packages in American history. As part of this $2 trillion, Congress set aside $349 billion for the relief of small businesses, to be administered by the Small Business Administration in the form of the Paycheck Protection Program . In the year since, the SBA has disbursed $663 billion in forgivable loans to eligible businesses.
History
Firms that benefited from SBIC investment in their early stages include Apple, Costco, Federal Express, Intel, Tesla, and Whole Foods.
Mechanics and Requirements
Favorable Legal Treatment
Economics
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The Loans Made By An Sbic
The loans made by SBICs are known as debentures and are either standard or discounted. As the name suggests, a discounted debenture has payment terms and an interest rate that are better than those of a standard debenture. The discounted debentures come in two different forms:
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Low to moderate income debentures these investments have to be made to small businesses that have a minimum of 50% of their employees or assets based in low-to-moderate income zones, or 35% of full-time employees living in an LMI zone.
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Energy-saving debentures these investments have to be directed into businesses that are primarily engaged in activities that will reduce the use of non-renewable energy.
Tips For Small Businesses During Times Of Economic Crisis
- If your business has been hit hard during the pandemic, you may be able to take advantage of several financial relief programs. The government and the SBA have established multiple programs to help small businesses recover. See whats available in our review of the coronavirus relief for businesses.
- A financial advisor can help you navigate tough times. If youre not sure where to begin, SmartAssets free financial advisor matching tool can help. The tool connects you with up to three advisors in your area.
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