Small Business Investment Company Program Benefits
The SBA's Small Business Investment Company (SBIC) program seeks to stimulate and supplement the flow of private equity capital and long-term loan funds to small businesses, which small business concerns need for the sound financing of their business operations and for their growth, expansion. , and modernization when such capital is not available in adequate supply.
The SBA, through the SBIC program, licenses privately and publicly managed investment funds that raise capital from private investors and then combine it with capital obtained through the SBIC’s issuance of a taxpayer-backed debenture guaranteed by the SBA. The SBIC invests this combined capital in qualifying small businesses through terms established between the SBIC and small businesses within the parameters of the SBIC program regulations and SBA oversight.
Small businesses seeking capital from SBICs are typically later-stage, mature, profitable businesses that are generating cash flows sufficient to service interest and sometimes principal payments. SBIC small business financings are primarily in the form of subordinated debt with equity enhancements. SBIC financings to small businesses typically range from $2.5 million to $10 million.
However, each SBIC has its own investment profile in terms of targeted industry, geography, company maturity, and the type and size of financing the SBIC will provide to small businesses. Small businesses interested in the possibility of receiving investment capital from an SBIC are encouraged to contact SBICs directly.
About the SBIC program
Since 1958, the mission of the Small Business Investment Company (SBIC) program has been to stimulate and supplement the flow of private equity capital and long-term debt financing that American small businesses need to operate, expand and modernize their businesses. The SBA does this by licensing and providing capital to professionally managed equity and debt investment funds as Small Business Investment Companies.
SBA capital comes in the form of, a government-guaranteed loan to the fund to match privately raised capital. The SBA-guaranteed loan, paired with private capital, increases access to financing for qualifying U.S. small businesses and startups while potentially improving risk-adjusted returns for private investors.
Types of SBICs
Standard Debenture SBICs: The Standard Debenture SBIC license is designed to align with the cash flows of mezzanine, private credit and other investment strategies with a current pay component that may have a more internal rate of return (IRR) orientation. Standard Debenture SBICs are eligible to receive SBA-guaranteed loans with interest payments on SBA loans due semi-annually. Because of the semi-annual interest component, Standard Debenture SBICs have historically been a strong fit for funds pursuing strategies that invest in small businesses that have consistent cash flows over the term of the fund, such as private credit or mezzanine investing strategies.
Accrual SBICs: The Accrual SBIC license is designed to align with the cash flows of longer duration equity funds with a more long-term focus and multiple orientation. Accrual SBICs are eligible for SBA-guaranteed loans, Accrual Debentures, where accrued interest and principal are due upon maturity and may be prepaid upon a distribution event.
Reinvestor (Fund-of-Funds) SBICs: The Reinvestor SBIC license is based on a fund-of-funds model to invest equity in underlying funds with an underserved focus that, in turn, invest directly into small businesses and start-ups. Fund-of-funds Reinvestor SBICs:
- Utilize the Accrual Debenture instrument
- Are eligible for a match of 2x private capital raised (Up to a maximum of $175 million in guaranteed principal and interest)
- Must invest ≥ 50% of the portfolio in underlying funds
Non-Leveraged SBICs: Non-Leveraged Licenses are SBA licensed private funds that do not apply for funding from SBA. There are several benefits to obtaining an SBIC license without SBA leverage commitment, including eligibility for Community Reinvestment Act (CRA) credit for bank investors.
Benefits of forming an SBIC
As a licensed SBIC, funds can leverage their private investment dollars with SBA-guaranteed debt that allows them to increase their investments in U.S. small businesses and startups. When it’s time to realize its investment, the SBIC repays the SBA-guaranteed debt plus interest and distributes returns to its private investors.
For more than a decade, SBICs have delivered returns to their investors that are in line with those available from other private equity funds in the market. Since 1998, SBICs that benchmark in the top half of private equity have delivered a 5 to 10-point boost in the IRR delivered to LPs as a result of SBA leverage.
Here are some additional benefits beyond the potential for enhanced returns of becoming an SBIC:
Rapid fund deployment: The potential to capitalize on as much as two-thirds of a fund with SBA leverage means managers spend less time fundraising and more time investing.
Access to long-term capital: The SBA provides long-term funding, which is often patient capital that aligns with the long-term growth plans of small businesses and startups. This type of capital is essential for businesses that need time to grow and establish themselves.
Flexible terms and investment opportunities: The duration of SBA’s financing instruments can be matched up with short- or long-term investments. SBICs have the flexibility to invest in a wide range of industries and sectors, promoting diversity in their investment portfolio. This flexibility allows managers to adapt to market trends and capitalize on emerging opportunities.
Exempt from SEC registration: SBICs are exempt from SEC registration, yet LPs benefit from SBA’s careful monitoring of each fund’s performance and regulatory compliance.
Exempt from Volcker Rule: SBICs are exempt from the bank investment limitations set forth in the Volcker Rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Increased financial scale: SBA leverage allows funds to scale up their strategies and extend their financings to more businesses.
Tax advantages for LPs: An SBIC’s LPs may be eligible for tax benefits as investments in SBICs are presumed to be a “qualified investment” for Community Reinvestment Act credit.
Characteristics of a successful SBIC
Investment funds licensed as SBICs typically have four basic characteristics:
- Experienced management team: Team members have complementary skills and a history of working with each other.
- Proven investment strategy: Fund pursuing a familiar strategy that the principals have successfully pursued as investors or operators in the past.
- Track record of success: Demonstrated prior track record of successful investments in the targeted strategy, possibly augmented by analogous, relevant operations management, entrepreneurial or other commercial experience.
- Appealing fund structure: The SBIC’s structure aligns the incentives of the SBIC’s managers and investors with the overall mission of SBA.
Regulations governing SBICs
The full regulations governing the SBIC program can be found in Section 13 CFF 107.720, but in summary, SBICs must invest in U.S. small businesses, which are defined as having the following:
- Tangible net worth of less than $24 million and average net income after Federal income taxes for the preceding two completed years of less than $8 million.
- Or, the industry size standard covering the industry in which the applicant is primarily engaged.
At least 25% of an SBIC’s financings must be in smaller enterprises, defined as having the following:
- Net worth less than $6 million and average net income after Federal income taxes for the preceding two years of less than $2 million.
- Or, the size standard for the industry in which it is primarily engaged.
SBICs may not invest in, with certain exceptions (for more detail review section 13 CFF 107.720), any of the following:
- Passive businesses
- Real estate businesses
- project financing
- farm land purchases
- Businesses contrary to public interest
- Foreign investments
- Associated suppliers
Small Business Investment Company Program Eligibility
To obtain SBIC financing, you should first identify and investigate existing SBICs that may be interested in financing your company. Use the SBIC directory as a first step in learning as much as possible about SBICs in your state, or in other areas important to your company's needs. In choosing an SBIC, consider the types of investments it makes, how much money is available for investment and how much might be available in the future. You should also consider whether the SBIC can offer you management services appropriate to your needs. Only companies defined by SBA as "small" are eligible for SBIC financing.
What are the loan terms for Small Business Investment Company Program?
Terms are privately negotiated between the SBIC and small businesses within the parameters of the SBIC program regulations and SBA oversight.
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Distribution waterfall guidelines
Standard Debenture SBICs: Can distribute returns to their investors over the lifecycle of the fund, provided they are current with the semi-annual interest payments on the 10-year loan. Accrual and Reinvestor SBICs: Can distribute capital to their investors over the lifecycle of the fund provided accrued interest and annual charges due to the SBA are paid off prior to distributions to private investors.
Accrual and Reinvestor SBICs can make tax distributions without first paying down accrued interest. Non-Leveraged Licensees: Can distribute profits to their investors without seeking prior approval from SBA, but only if they maintain enough "Regulatory Capital" to meet minimum capital requirements specified in §107.210 or its SBA-approved "Wind Down Plan."
SBIC application process
- Applying for an SBIC license is a three-part process: Pre-screening review - (Short Form 2181)
- Management Assessment Questionnaire (MAQ) and MAQ fee - (Long Form 2181 or Subsequent Fund Form 2181 and Form 2181 Exhibits)
- Final License Application and Licensing fee
Applicants may consider completing and submitting a Pre-screen Form 2181 to SBA to receive feedback. This an optional step, but one that is highly recommended for first-time applicants to the SBIC Program. The feedback is informal and non-binding, but it helps prospective applicants better understand SBA’s underwriting criteria and reassess their own fit with the program.
The Pre-screen 2181 contains a subset of forms contained in the full MAQ. Specifically, the Short Form 2181 contains the following:
- The Overview
- Investment Track Record
- Principal Biographies
Completing this form can help prospective applicants prepare for the MAQ without incurring the cost of the MAQ Application Fee. This information gives background context to aid SBA in providing informal feedback.Direct Home Loans For Native American Program Benefits
Management Assessment Questionnaire (MAQ)
Once you have decided to move forward with the application process, the next step is to prepare and submit the MAQ, which consists of the following:
- Form 2181 (Long Form or Subsequent Fund Form)
- Form 2181 Exhibits A - D
- Attachments/Supplemental Materials
- Payment of Initial Licensing Fee / “MAQ Fee”)
After receipt of your MAQ (including payment of the Initial Licensing Fee / “MAQ Fee”), a Licensing Investment Analyst and SBA Legal Counsel will be assigned to review your application. Once the application has been filed and accepted for processing, Licensing and SBA Legal will review the MAQ submission, performing operational and investment due diligence and legal review of the relevant documents. Upon completion of due diligence and reviews, Licensing will recommend to the Investment Committee whether the applicant appears to have the minimum qualifications necessary to manage the proposed SBIC.
If the Investment Committee concludes, by majority vote, that the management team appears to be qualified, the applicant is invited for a one-hour formal interview. After the interview, the Investment Committee will consider whether your management team has the experience and skills necessary to manage an SBIC. If they vote affirmatively, your application will be reviewed by the SBA Agency Licensing Committee for approval. If the SBA Agency Licensing Committee votes affirmatively, the SBA Administrator will vote on your application.
If approved by both Committees and the SBA Administrator, your application will be approved for a “Green Light” letter inviting you to submit a final License Application once sufficient capital has been raised to hold an initial closing. An Applicant may hold multiple closings within 12 months of its initial closing based on the date of formal SBA license approval. A final close must be held within 12 months of receipt of formal SBA license approval. A fund may not accept additional capital commitments 12 months after the date of formal SBA license approval.
Applicants who meet all eligibility criteria under 13 CFR § 107.305 for Expedited Subsequent Funds Licensing, may apply using the Subsequent Funds Form 2181 which is comprised of a subset of the forms required in the Long Form 2181.
The License Application is submitted when the applicant has sufficient Regulatory Capital to hold a close and has completed all required forms. The application builds upon the previously submitted MAQ and includes additional forms and documentation. The entire package includes the following:
- Form 2181 (UPDATED to include any changes since the Green Light Letter)
- Form 2181 Exhibits A - D (UPDATED to include any changes since the Green Light Letter)
- Form 2181 Exhibits E - G
- Copies of all final legal documents + redlined copies detailing any and all changes to previously submitted legal documents
- Payment of all application and Final Licensing Fee and other fees which may at that time be due (e.g., the Resubmission Penalty Fee, if applicable and if not already paid)
Upon receipt of the License Application and full payment all Licensing Fees, a Licensing Investment Analyst and SBA Legal Counsel will review the materials and recommend whether the SBA's Agency Licensing Committee and SBA Administrator vote stands or whether there is evidence of material adverse changes which would trigger. a revote. If no material adverse changes are identified, the License Application will be submitted to the SBA Administrator for formal final approval.
Through this process, from Pre-screening through Licensing, you will work closely with the analysts and managers of SBA’s Office of Investment and Innovation. At various times, you may receive both informal questions and formal SBA Comment Letters. Prompt and courteous replies will minimize delays in licensure.
Initial Licensing Fees as of the publish date of this document are as follows:
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The Final Licensing Fee as of the publish date of this document is calculated as the “Final Licensing Base Fee” plus 1.25 basis points multiplied by the Leverage dollar amount being requested by the applicant and conditionally approved by SBA, communicated as the “Total Intended Leverage Commitment.” As the fee is based on the amount being requested, the Applicant will multiply the Total Intended Leverage Commitment dollar amount provided at the time of Green Light approval by 1.25 basis points and add this amount to the Final Licensing Base Fee, where the Final Licensing Base Fee is based on the applicant’s Fund Sequence as follows:
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Small Business Investment Company Program
The Small Business Investment Company (SBIC) program is a federal program in the United States that provides funding to small businesses in the form of debt and equity. The program was created to help small businesses access the capital they need to grow and expand. It is operated by the U.S. Small Business Administration (SBA) and has been in existence since 1958.
The SBIC program works by providing funds to privately owned and managed investment firms known as Small Business Investment Companies. These SBICs, in turn, provide financing to small businesses in the form of equity investments, long-term loans, and debt securities. The SBICs are required to focus on investing in small businesses that have the potential for growth, job creation, and economic development.
The program benefits small businesses by providing them with access to much-needed capital that might be difficult to obtain through traditional lending channels. Additionally, the SBIC program benefits investors by offering them the opportunity to invest in a diversified portfolio of small businesses, which can potentially yield higher returns than traditional investment options.
Furthermore, the SBIC program encourages economic growth by fostering entrepreneurship and job creation, particularly in underserved markets and industries. It also provides support and guidance to small businesses beyond just financial assistance, helping them to develop and grow sustainably.
Overall, the Small Business Investment Company program plays a vital role in promoting the growth and success of small businesses in the United States. It is an essential component of the SBA's efforts to support the development of the small business sector and stimulate economic prosperity.