A small business investment company (SBIC) is a company that provides debt and equity financing to the small businesses and must be having a license from Small Business Administration (SBA). The history of SBIC dates back to 1959 when according to the Small Business Investment Act, the federal government and the private capital had partnership in order to provide financial help to the small business community of the US.
The small business investment companies are the financial companies that offer long term debt and equity capital to the small business community. The small business investment companies are mainly venture capital firms that are privately owned.
The small business investment companies need to have license from the Small Business Administration. The SBICs generally use their own fund that is arranged at a favorable rate with an SBA guarantee and provides debt equity, long term loans and equity capital to the small businesses that qualify for the loan.
Generally the SBICs give a wide range of investment opportunity to the small businesses while some may even make investment in some specialized segment of business. The Specialized Small Business Investment Companies licensed by SBA mainly provide their investments to those small businesses whose owners are socially or economically disadvantaged.
The small businesses that need SBIC financing in the US must have a net worth of $18 million or less than that and the average net income for the previous two years should not exceed $6 million with an exception to those companies that find these two standards too low for them.
The profits earned by the small business investment companies are by buying equity in the borrowing company or by leaving an option to have equity in that company. This is the reason that made the SBIC to avoid straight equity investment in the early stage companies and rather investing in the stocks or debts with warrants.
In order to encourage the SBICs to make more equity investment, in 2004 the SBA introduced a new participating security. According to that the SBA will now possess a dividend and will participate in the long-term profits of the SBIC and the profit percentage of the SBA will depend on the degree of the advantage of the SBIC.
The structure of financing by SBIC varies largely from deal to deal. Most of the times the investments made by the SBICs involve loans with an option to own equity or just providing a straight loan in case when the concerned company is a mature one.
Last Updated on : 22th July 2013