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Is SBIC Financing Right for your Business?

Deciding Whether SBIC Financing is Right for Your Business

SBIC financing may not be appropriate for all types of businesses and financing needs.  Before deciding whether to seek SBIC financing, you should first consider the following:

1)      Does your business qualify as an eligible SBIC financing?

2)      Do SBICs provide the type of financing appropriate for your small business?

3)      Does your company match the investment profile of an SBIC?

If you decide that your business is a good fit for an SBIC investment, How Should You Approach an SBIC for Financing? provides information on seeking capital from one of our many SBICs.

1) Is your business eligible for SBIC financing? 

  • SBICs can only invest in small businesses.  Small businesses are generally defined as businesses with tangible net worth of less than $18 million AND an average of $6 million in net income or less over the previous two years at the time of investment.  A business may also be deemed "small" based on its industry using 13 CFR §121.201.
  • SBICs cannot finance foreign activities.  Such activities include:  investments to support foreign operations or businesses with more than 49% of their employees or tangible assets outside the U.S.
  • Although SBICs invest in many different industries, SBICs are prohibited from financing any of the following: re-lenders or re-investors; passive businesses; most real estate businesses; farmland; project financings, or businesses contrary to the public interest.

13 CFR § 107 Subpart G - Financing of Small Businesses by Licensees provides further information on SBIC eligible financings.

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2) Do SBICs provide the right type of financing for your small business? 

SBICs may provide capital in the form of loans, debt securities (mezzanine debt with equity features, such as warrants), and equity. In most cases, SBICs may charge interest rates no higher than 19% for loans and 14% for debt securities.

But most SBIC financings are below these maximum interest rates.   Between 2010 and 2012, SBICs licensed since October 1, 2002, reported almost $6.8 billion in financings to small businesses as follows: 

Metric

Loans

(no equity features)

Debt with Equity features

Equity

Percent of SBIC Financing Dollars

48%

34%

18%

Typical Financing Size Over 3 Year Period

$250,000 to $10 million

$250,000 to $10 million

$100,000 to $5 million

Typical Cost of Financing

Interest 9 to 16%

Maximum:  19%

Interest 10 to14%

Maximum:  14%

Equity

Median Small Business Revenue at 1st Financing

$26 million

$14 million

$10 million

 

As shown above, the majority of SBIC financings are in loans and debt securities in more mature businesses.

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3) Does your company match the investment profile of an SBIC?

SBICs invest in a broad range of portfolio companies.  As shown in the SBIC Annual Report’s Economic Section SBICs as a class invest in companies located across the United States in many different types of industries.

Because most SBICs provide capital in the form of loans and debt securities, SBICs typically target more mature businesses with sufficient cash flow to pay associated interest.  Based on initial SBIC financing data, the majority of small businesses financed by SBICs using loans or debt securities were profitable.

Although SBICs made equity investments in many small businesses not yet profitable, most had significant revenues.

However, each SBIC has its own investment profile in terms of targeted industry, geography, company maturity, and the types and size of financings they provide.  If you decide to seek SBIC financing, you should first research SBICs to identify those funds that are the best fit for your business.

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