06 Aug Small Business Investment Companies (SBIC) are Attractive Alternative to Venture Capital
Small Business Investment Companies (SBIC) were created by Congress in 1958 to ensure that small and lower middle-market companies have access to long-term capital. Many business owners and even most bankers don’t know the program exists or how it can benefit a business owner.
SBIC Organizations are Private Equity Funds That Are Chartered by the Small Business Administration
Unlike SBA guaranteed bank loans that many business owners are familiar with, the SBIC program is organized through the SBA to protect investors in the SBIC fund. Institutions and private investors that invest in SBIC funds are guaranteed by the SBA program that they will not lose their principal investment. SBA rules require a minimum of $20 million in equity capital to start a SBIC fund. That is the same amount of money required by federal regulators to start a bank. Many SBIC organizers acknowledge that the application process to start a SBIC fund is a long complicated process.
SBIC Funds are Organized Geographically, by Type of Investment they Make and Often by Industry Focus
SBIC funds are highly regulated to protect small and middle-market businesses from unreasonable rules and requirements. There are about 300 SBIC funds in the United States. Each is chartered in a specific state by the SBA, but a SBIC may elect to operate in a regional area or throughout the U.S. SBIC funds can help small and mid-sized companies:
- Early Stage Equity. Funds that invest equity into small companies generally make an investment that will allow an entrepreneur with a great idea to commercialize the idea with minimal equity given up by a business.
- Senior Lending. SBICs can make senior loans to credit worthy, established businesses.
- Subordinated Debt. Funds can elect to make a special type of loan to a business needing growth capital. Subordinated debt means the SBIC agrees to have less security in the business collateral in favor of a senior lender (normally a bank). Subordinated debt is often called “growth capital.”
- Mezzanine Debt/Capital. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. It is typically used when a company is cash flow positive but has high growth opportunities.
- Turnaround Capital. SBIC funds can elect to make debt or equity investments into companies that have experienced a non-operational event that has created financial difficulties. When a SBIC fund believes a company can turn around, they may invest or make a loan to assist it to complete its return to profitability.
- Growth Capital. Companies that have very steep growth rates often cannot fund their growth out of profits. Growth capital helps a business dramatically increase profitable growth.
- Leveraged / Management Buyouts. When a company is in ownership transition, either because a member of management or outside party is planning to acquire the majority shares of a company, SBIC funds can step in and provide some or all of the capital necessary to make the ownership transition occur.
Examples of Major Companies that Started with SBIC Investments
SBIC funds have a great deal of flexibility about the types of investments it makes as long as it follows its charter which outlines its investment plan. They are highly preferred over venture capital.
Finding a SBIC with a Program Tailored for your Business can be Difficult
SBIC funds naturally tend to focus on vertical markets they feel comfortable with. For example, some focus on oil and gas service company investments, but most shy away from the industry because they don’t have the expertise to manage their loan/investment.
Some SBIC funds are extremely highly focused. For example, at one time there was a SBIC that focused 80% of its investments in businesses that created material science technology. Examples include adhesives, coatings, polymers, and carbon fiber. The fund would not likely be interested in working with companies that create software apps or other companies that are not in the material science space.
How Business Finance Solutions can help you secure a SBIC investment or loan
Business Finance Solutions has placed out tens of companies with SBICs over the last 20+ years. We understand the complex process of finding and packaging an investment/loan for SBIC approval.
- We have an extensive database of SBICs, their investment staffs, and their vertical market priorities.
- Over the many years we have been working with clients seeking SBIC investment, we have developed a very effective process of developing the materials SBICs want to see.
- We coach our clients before presenting their investment needs to an investment committee.
- We understand the term sheet negotiation process and can help save you thousands of dollars in costs over the life of the loan or investment.
- We can assist when your company reaches a stage of growth that requires a follow-on investment.
In 2014 we wrote a post about the differences between SBICs and BDOs. BDOs are also regulated entities but work entirely differently than SBICs.
For more information about using a SBIC fund to help your business grown, fill out our contact form or give us a call at 512.990.8756. We will be happy to discuss your specific situation.