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The SBA’s Small Business Investment Company Program (SBIC)

What is the SBA’s SBIC Program?

The SBA’s Small Business Investment Company (SBIC) Program was created in 1958 in an effort to fill the gap between entrepreneurs’ need for capital and traditional financing sources. Licensed by SBA, SBICs are professional, privately owned and managed venture capital funds that serve as the link for the government to the private sector economy. Through the SBIC Program, the SBICs provide equity capital, long-term loans, and debt security investments to small businesses. SBICs in this sense are different than venture capitalists as they will invest in debt, e.g. loans, debt security investments. Venture capitalists are interested in investing only in businesses for equity.

What is a venture capitalist?

Venture capital refers to an institutional investor asset class usually for scalable start-up or young companies with exceptional growth potential. Such investors provide money but also managerial expertise, and in exchange, seek profitable return at varying multiples to their investment typically five to eight years down the road.

For more information on Venture Capital especially if you feel it might be appropriate for your business, we recommend you review The Brain’s Guide to Venture Capital.

Who should/is eligible to apply to SBICs?

Small businesses that need funding to get off the ground and grow, but are unable to receive funding from regular channels or investors, should seek funding from SBICs.

The companies that fall under small businesses according to SBA’s regulations and size standards are eligible for SBIC financing. Typically, a company is defined as small if its net worth does not exceed $18M and has an average after-tax net income (for the two prior years) of $6M or less.

How to apply for small business funding to SBICs?

Small businesses seeking venture capital should first identify the best suited SBICs and then apply directly to them. There exists a master list of SBIC on the SBA web site.

How to seek/prepare for a SBIC?

Before negotiating any funding, small firms seeking venture capital should do a thorough investigation of all the possible SBIC candidates. Some specific points to note about the SBICs are:

  • What types of financing they provide
  • How much money is available
  • What types of businesses/sectors they invest in
  • What management assistance (if any) is available.

Also, before talking with a SBIC, firms should have a business plan with historical and current financial statements prepared because most SBICs will require these to evaluate any proposal for financing.

What are the advantages and disadvantages of the SBIC Program?

Advantages of going through the SBIC program:

  • They invest in several different industries and focus on a general geographic area
  • SBICs’ investment professionals often offer to get involved in the business’ projects and aim to contribute as much as possible to see good returns
  • Investment professionals can offer high quality professional and technical assistance and connections
  • Can help to obtain government contracts

Disadvantages of going through the SBIC program:

  • Not as good as getting a grant (basically free money)
  • They have a timetable to be repaid, which can raise conflicts if a company’s business plan is shorter
  • They will only consider small businesses with a net worth of $18M or less and an average after-tax net income not exceeding $6M for the last two years.