Finding Money!
Small Business
Investment Corporations

Have you seen that funny guy in the question mark suit on TV? I think he's responsible for many of the questions I've been getting recently on finding government money for your business. He makes it sounds so easy! Yes, the programs are there and we've already covered many of them in some depth on this site. (See our Money Matters section at for those directories and articles.)

The U.S. government does not offer a lot of grants for businesses, and the grants that are offered are directed either to technical development that the government is interested in furthering or to offset the economic problems of particular areas. The U.S.D.A.'s Rural Development grants are good examples of government money used to promote growth in rural areas. SBA backed loans are a good deal for companies that get them and can use the capital to start, grow, finance inventory, seasonal needs or capital expansion.

But what if you have a small business that is ready to grow quickly? What if you need to find another way to provide the funds for a business when an owner leaves? And what if the amount of money needed is bigger than what the bank will lend you, even with an SBA-backed loan?

Small Business Investment Companies, commonly referred to as SBICs, are companies that can fill that gap for small business. The government established this program in 1958 and it has a great track record. Since 1958, more than 85,000 small businesses have received more than $20 billion dollars total from SBICs. Currently, the over 350 SBICs in the U.S. have over $11 billion dollars invested, or ready to invest, in small businesses. In 1998 alone, more than $3.2 billion was invested in over 2,500 small companies in the U.S. by these sources of finance.

Okay, you ask, what's the big deal? How are SBICs different from my local bank? The biggest difference is that the local bank does not have the government investing with them. Most SBICs are formed by small groups of local "angel" investors, although many SBICs are owned by commercial banks. Banks can invest up to 5% of their capital and surplus in an SBIC. The SBIC operations are separate from their regular banking operatons.. For every dollar an SBIC raises, the government will allow them to raise 3 additional dollars in SBA guaranteed debt - up to $105.2 million in matching funds per SBIC! Yes, the SBIC has to pay the debentures off, but it is a very sweet source of low interest, "patient" money with a ten year term of maturity to invest in small businesses. Some Specialized SBICs make loans to or invest only in businesses owned by people who have been denied the opportunity to own and operate a business because of a social or economic disadvantage. In 1996, the legislation chartering new SSBICs was revoked, so no new SSBICs have been licensed since them. SSBICs that were already operating in 1996 continue to operate under a grandfather clause.

Unlike standard banks and other government backed programs, the SBICs can also buy equity (stock) in a client company. Each SBIC chooses either to make loans to small companies or invest equity in them. For the client company, each has its advantages. If your business has steady cash flow that can pay off a loan, the interest on loans is a deductible expense and it allows you to maintain more control of your business. If your business is not making enough money to make regular loan payments, an SBIC willing to invest in your equity is the way to go. This often happens when your business is not going to make money in the short term but will once things are rolling. In either case, the SBIC needs to get its money back at some time in the future so that they can pay their investors and the government for the loan of the money.

SBICs are for-profit companies. They can invest in a wide variety of business opportunities, ranging from startups to established companies.

How small does a company that receives an SBIC investment or loan have to be? The SBA says a company generally must have equity worth $18 million dollars or less and after tax income for the previous two years cannot exceed $6 million. There are some exceptions where a company can be larger because the average company in the industry is very big, so if your company grows large enough for this to be a factor, it pays to check and make sure. All of the company's corporate family is considered in making this determination of size, including affiliates. Consider this if you have a bigger company that may invest in your business in return for some of your equity.

You can find a list of the SBICs in the U.S. at http://www.sbaonline.sba.gov/gopher/Local-Information/Small-Business-Investment-Companies/ The site also contains information on:

-Cynthia Nemeth-Johannes