According to the National Association of Small Business Investment Companies, SBICs have disbursed over $9 billion to over 65,000 small businesses in the U.S. Thousands of profitable business owners can relate how much they have benefited from financing made available to them through SBICs. What follows is a brief explanation of SBICs and how to make contact with SBICs in the District of Columbia, Maryland, and Virginia areas.
Table of Contents
What Is An SBIC ?
In 1959 Congress enacted the Small Business Investment Act. The Act created a partnership between the Federal government and private capital for the purpose of financing the country’s small business community. Small Business Investment Companies (“SBICs”) are financial institutions which provide equity capital and long-term debt to the small business community.
SBICs are licensed by the U.S. Small Business Administration (“SBA”), but are privately-managed firms. In return for pledging to finance only small businesses, SBICs qualify for long-term financing from the SBA. SBICs make only long-term loans or equity investments; therefore, the interest of the small business owner and the SBIC coincide as both want the firm to grow and prosper.
Historically, SBICs have borrowed most of their capital; thus, they have needed to charge interest on their disbursements to small business. For example, an SBIC may pay the SBA 10% for their funds and then invest/lend them to a small business at 12%. The 2% margin covers the SBICs operating overhead but does not generate much profit for the SBIC stockholders. Most SBICs make their profit by owning equity in the borrower or by having an option to own equity in the small business. Because of the above, SBICs historically have avoided straight equity investments in early stage companies, preferring to invest in preferred stock or debt with warrants.
To encourage SBICs to make true equity investments and to eliminate any mismatching of funds, the SBA introduced a new participating security in 1994. Instead of receiving current interest income, the SBA will accrue a dividend and participate in the long-term profits of the SBIC. SBA’s percentage of profit participation will depend on the degree of leverage of the SBIC. The new participating security offered by the SBA should increase the availability of equity financing from SBICs.
Contacting An SBIC
A complete business plan may not be required to hold a preliminary discussion, but is generally a pre-requisite for funding. Specifically, a business plan should include an executive summary, profile on management, product description with, focus on its proprietary aspects, market and industry analysis, and historic and projected financial statements.
Your firm is qualified for SBIC financing if it has a net worth of under $18 million and average after tax earnings of less than $6-million during the past two years. if your firm does not meet these tests, it may still qualify as a small business under either an employment standard or amount of annual sales standard. Both of these standards vary from industry to industry.
How Are SBIC Financings Structured ?
SBIC financings vary from deal to deal, but most investments involve loans with options to buy equity or are structured as convertible debentures. in the case of a financing for a mature company, a SBIC will occasionally provide a straight loan. In the case of a first-round financing, preferred stock is sometimes used. The SBIC financing will be tailored individually to meet the cash flow requirement of the company and to make the best use of the SBIC funds. All terms will be negotiated.
Types Of Investments
SBICs differ in size and investment philosophy. Each SBIC has a policy on the type of financing it prefers (size, industry preferences and geographic requirements). For a complete list of over 177 active SBICs contact the National Association of Small Business Investment Companies, 1199 N. Fairfax Street, Ste. 200, Alexandria, VA 22314. NASBIC can also be reached by calling 703-683-1601.
SSBICs
There are approximately 103 Specialized Small Business Investment Companies (“SSBICs”) which operate in the U.S. These firms are licensed by the SBA to provide financing for businesses which are 51% owned by socially or economically disadvantaged persons. In general, SSBICs operate like an SBIC and seek investments that provide adequate returns for the risk taken. For more information and a directory of active SSBICs, contact the National Association of Investment Companies (“NAIC”) at 202-289-4336.
SBA Guaranteed Loans
In addition to providing SBICs with capital, the SBA provides financing in the form of SBA 75% guaranteed loans. Several banks and a few non-banks handle such financing. The maximum amount that the SBA will currently guarantee is $500,000. Obtaining better terms and securing enough money to adequately capitalize the small business are the chief benefits of an SBA guaranteed loan.
The SBA guarantee allows lending institutions to lend long-term and provide more attractive rates. The SBA guarantee also enables the lender to provide more money for a business than conventional credit terms would permit. It is common for a small business to receive 100% financing on land and building, machinery or equipment. However, this can only occur when there is sufficient equity in the business or substantial additional collateral available to support the loan. For a list of lenders, write to the Deputy Director of Finance, Small Business Administration, 1441 L Street NW, Washington, DC 20416.
William F Dunbar, President, Allied Capital Corporation H; Chairman, NASBIC (202-331-1112) and Thomas H. Westbrook, Senior Vice President, Allied Capital (202-973- 6314)
