A Small Business Investment Company (SBIC) is a specialized investment entity licensed and regulated by the Small Business Administration (SBA) to provide critical funding to small businesses in specific industries. These companies play a vital role in fueling the growth of emerging enterprises by leveraging a combination of private capital and government-backed funds. However, to maintain their SBA-approved status, SBICs must adhere to stringent regulatory guidelines designed to ensure responsible and impactful investment practices.
If you’re a small business owner or investor looking to explore opportunities with SBICs or other growth-focused funding options, consulting a financial advisor can help provide guidance.
What is a Small Business Investment Company (SBIC)?
A small business investment company (SBIC) is a privately-owned company that funds small businesses through debt and equity investments. The SBIC typically uses its own capital, along with funds borrowed with SBA guarantee, to lend to small businesses, according to the SBA. SBICs are licensed and regulated by the SBA.
The SBA says it doesn’t invest directly into SBICs, though; instead, the SBA offers the funding to qualified investment firms with certain industry expertise. These SBICs then distribute the funds to small businesses. SBIC loans can range from $25,000 to $10 million.
How SBICs Work
SBICs provide funding to small businesses by combining the capital they raise with funds borrowed at competitive rates, supported by loan guarantees from the Small Business Administration (SBA). Rather than directly investing in small businesses, the SBA facilitates access to additional capital for SBICs by guaranteeing their loan obligations, known as debentures.
Requirements for Small Business Investment Companies (SBICs)
The SBA has established several regulations to which SBICs must adhere. SBICs must invest:
- 75% of total capital in U.S. small businesses, defined as having the following:
- No more than 49% of employees overseas
- Less than $19.5 million of tangible net worth
- Less than $6.5 million of after-tax net income averaged over the previous two years
- At least 25% of total capital in U.S. smaller enterprises, defined as having the following:
- No more than 49% of employees overseas
- Less than $6 million of tangible net worth
- Less than $2 million of after-tax net income averaged over the previous two years
SBICs can’t invest in more than 10% of investable capital in any one business, nor can they invest in U.S. small businesses that have more than 49% of their employees overseas. SBICs also can’t invest in real estate, re-lenders and project finance, according to the SBA.
Bottom Line
SBICs offer financing to small businesses through debt and equity investments. These investment firms aid small businesses with their own capital. But they also use borrowed funds from the federal government. If you’re a small business in need of funding, you may qualify if at least 51% of your employees and assets are based in the U.S., your company is an SBA-defined small business and you’re in an eligible industry.
Tips for Small Business Owners
- A financial advisor can help you navigate tough times. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you don’t have an online brokerage account yet, take time to compare options before opening one. Specifically, pay attention to the types of accounts you can open, the range of investment options available, minimum investment requirements and the fees a brokerage charges. If you also plan to trade stocks, exchange-traded funds or other investments while purchasing debentures, you may want to choose a brokerage that charges $0 commission fees.
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