Growth Capital through Private Investment Funds

This post originally appeared on SBA.

SBA’s loan-guaranty programs are among the best-known ways we fulfill our mission of helping small businesses start, grow, and succeed.  In FY13, for example, together with our lending partners we facilitated over $29 billion dollars in loans to new and existing small businesses.

But for some small businesses, equity financing is a better option – and SBA has great tools to help those businesses too.  One of my priorities as Regional Administrator is spreading the word that our Small Business Investment Company (SBIC) Program provides additional capital to private fund managers for investment in high-potential small businesses.

Greater capital access for our fastest-growing businesses

Costco, Amgen, Apple, FedEx, Staples, Intel – these are just a few of the well-known companies supported by SBIC investments in the past.  Five decades since its creation, the SBIC program continues to be among our most innovative examples of public-private partnership, successfully channeling billions of dollars in growth capital to small businesses across the United States.

Streamlining and simplifying

To build on that track record, over the last few years President Obama and the SBA have streamlined and simplified the program.  We listened to our private sector partners, and we took action to get capital in the hands of small businesses more quickly. The results speak for themselves: in Fiscal Year 2013, we facilitated 1,846 financings for a record $3.5 billion — an 18.6% increase over the previous year.

As Regional Administrator for Region VIII, I’m committed to bringing more of that growth to Colorado, South Dakota, North Dakota, Montana, Utah, and Wyoming.

How it works

Small Business Investment Companies (SBICs) are privately owned and managed investment funds with a successful track record of investing in high-growth companies.  The SBIC designation is achieved through a licensing process with SBA, which provides regulatory benefits to fund investors and access to matching funds for investment.  This can double or triple the amount of capital available for investment in promising small businesses.  In other words, for every $1 the fund raises from investors, SBA can commit up to $2 of debt, subject to a cap of $150 million.  In FY13, average fund sizes ranged from $25 to $30 million in private capital and typically comprised twice as much in SBA leverage.

An attractive option for banks

SBICs allow investors to earn competitive returns, and when those investors are banks they can receive Community Reinvestment Act consideration. Banks can collaborate with SBICs to provide long-term financing to small businesses that might not otherwise obtain the financing they need from traditional sources. Bank investments in SBICs are also exempt from the Volker rule’s prohibition of banks investing in private equity.  

Further, because the SBA is a credit facility only and does not participate in the equity profits, banks’ investment returns are significantly enhanced.  Essentially, the provider of two thirds of the investment capital (i.e., the SBA) has zero participation in the profits.

How to learn more

For small business owners, visit our online directory of active SBICs in your area. For fund managers and fund investors, learn how to participate at www.sba.gov/inv. You may also email asksbic@sba.gov, or contact SBA’s Region VIII office at 303 844 0505.

Additional Resources

» Get Access to Small Business Investment Corporations