SBIC Financing, Step-by-Step
What Is an SBIC?
The Small Business Investment Company (SBIC) program was created by Congress in 1958 to help small U.S. companies raise the capital they need to fuel business growth. SBICs are privately organized and managed venture capital firms licensed by the U.S. Small Business Administration (SBA) to make equity capital or long-term loans (with maturities of at least five years) available to small companies. In return for agreeing to finance only small U.S. businesses in compliance with SBA regulations, SBICs qualify for funds raised by the sale of SBA-guaranteed securities which, when added to their private capital bases, increase the total capital SBICs have available to invest in small companies. With only some exceptions, SBICs have the freedom to invest in almost any type of business. Additionally, while all SBICs will consider applications from businesses owned by socially or economically disadvantaged entrepreneurs, Specialized Small Business Investment Companies (SSBICs) are chartered to invest exclusively in such businesses.
What Have SBICs Done?
Since 1958, SBICs have invested almost $60 billion in small U.S. companies, including approximately $2.05 billion invested in 1,331 small U.S. companies in Fiscal Year 2010 alone. The concerns they have financed have far outperformed national averages measuring increases in sales, profits, assets, and new employment. Some of America’s most successful and well-known companies received critical early stage financing from SBICs, including Intel, Apple Computer, Federal Express, Whole Foods Market, Staples, and Callaway Golf. Thousands of other small businesses, perhaps less well known but equally important in terms of the products, services, and jobs they provide, have benefited from the money and management counseling made available to them by SBICs. Whatever the field, from high tech to personal service, SBICs continue to invest today in companies that will be leaders in their markets tomorrow.
Which SBIC Should You Contact?
When reaching out to SBIC for financing you should consider the following factors:
A. Size of Financing: Because they differ in size and investment polices, SBICs establish different dollar limits on the financings they make. The directory lists each SBIC’s preferred size of loan or investment.
B. Investment Policy: Even though SBICs may make both equity investments and loans, each has a policy on the type of financing it prefers. You should match your requirements with the SBIC’s preference.
C. Industry Preference: SBICs differ widely in terms of preference for financing certain types of businesses. Because of the expertise of its officers and directors, an SBIC often specializes in making loans and investments in certain industries. You should try to contact those SBICs that have indicated a preference for your business type.
D. Geographical Preference: Generally speaking, SBICs prefer to invest in companies within a reasonable travel distance. Therefore, it would probably be wise to contact first those SBICs closest to your business.
Consider the information included in the directory only as a general guide. Every SBIC departs from its usual policies in special cases. Furthermore, SBICs often work together in making loans or investments in greater amounts than any of them could make separately. No SBIC should be ruled out as a possible source of financing, but this directory is designed to give you an idea about which ones are most likely to be interested in your plan.
Is Your Firm a Qualified Small Business?
A company qualifies as small if it has a net worth under $18 million and average after-tax earnings of less than $6 million for the past two years. If your firm does not meet these financial tests, it may it may still qualify as small under either an employment or annual sales standard. The employment and sales standards vary from industry to industry. Contact your local SBA office for more information.
How Do You Present Your Case to an SBIC?
A business plan that addresses your company’s operations, management, financial condition and funding requirements is essential. The plan should include the following information:
· The name of the business as it appears on the official records of the state or community in which it operates.
· The city, county, and state of the principal location and any branch offices or facilities.
· The form of business organization and, if a corporation, the date and state of incorporation.
PRODUCTS OR SERVICES
· A description of the business, including the principal products sold or services rendered.
· A history of the general development of the products or services during the past five years (or since inception).
· Information about the relative importance of each principal product or service to the volume of the business and to its profits.
PRODUCT FACILITIES AND PROPERTY
· Description of real and physical property and adaptability to other business ventures.
· Description of technical attributes of products and facilities.
· Detailed information about your business’s customer base, including potential customers.
· A marketing survey and/or economic feasibility study.
· A description of the distribution system for your products or services.
· A descriptive summary of the competitive conditions in the industry in which your business is engaged, including your competitive position relative to its largest and smallest competitors.
· A full explanation and summary of your business’s pricing polices.
· Brief résumés of the business’s management personnel and principal owners, including their ages, education, and business experience.
· Banking, business, and personal references for each member of management and for the principal owners.
· Balance sheets and profit and loss statements for the last three fiscal years (or from inception).
· Detailed projections of revenues, expenses, and net earnings for the coming year.
· A statement of the amount of funding you are requesting and the time requirements for the funds.
· The reasons for your request for funds and a description of the proposed uses.
· A description of the benefits you expect your business to gain from the financing; e.g., expansion, improvement in financial position, expense reduction, increase in efficiency, etc.
How Long Will It Take?
There are no hard and fast rules about the length of time it will take an SBIC to investigate and close a transaction. Ordinarily, an initial position or negative response is made quickly. On the other hand, the thorough study an SBIC must undertake before it can make a final decision could take several weeks or longer. Naturally, a well-documented presentation on your part will reduce the amount of time the SBIC will require to make a final decision.
How Are SBIC Financings Structured?
The SBIC financing will be tailored individually to meet your needs and to make the best use of the SBIC’s funds. You and the SBIC will negotiate the terms of the transaction. SBICs are often interested in generating capital gains, so they may wish to purchase stock in your company or advance funds through a loan with conversion privileges or rights to buy stock at a predetermined later date.
How Can SBIC Money Provide Additional Credit Lines?
If the SBIC money is provided to you in a subordinated position, it will often do double or triple duty. Industry averages show that for every SBIC dollar placed with a small business concern, two additional senior dollars become available from commercial banks or other sources.
Are There Unique Advantages to SBIC Financing?
Yes. Before it receives its license, an SBIC must prove that its management and directors are experienced individuals with a broad range of business and professional talents.
This expertise will be applied to assist your business, supplementing the skills of your own management team. Here again, the actual pattern of management and financial counseling will be tailored to each situation. SBICs can make only long-term loans or equity investments, and they are prohibited from taking control of the companies in which they invest; therefore, their interests and yours will coincide—both of you want to grow and prosper.
What Is The Small Business Investor Alliance?
The SBIC industry is represented in Washington, DC, by the Small Business Investor Alliance (Alliance). For over 50 years, the Alliance has promoted the growth and vitality of the industry through effective representation and successful professional programs.
Whether it is in working for more money for SBICs and, hence, the small companies they invest in, reduced regulatory burdens, or better program management, the Alliance is the primary representative of the SBIC industry.
Additionally, the Alliance sponsors and coordinates industry meetings and educational programs, including the annual Venture Capital Institute, widely recognized as the premiere educational program on venture investing.
For more information
Contact us by phone at (202) 628-5055 or visit our web resources at www.SBIA.org