Private equity: What is an SBIC?

Small Business Investment Companies and Specialised Small Business Investment Companies (SSBICs) are financial institutions created to make equity capital and long-term credit (maturity of at least five years) available to small, independent businesses.

According to the National Association of SBICs in the US, no institutional source of finance for venture capital existed until the passage of the Small Business Investment Act in 1958. They are licensed by the Small Business Administration, but they are privately organised and privately managed firms which set their own policies and make their own investment decisions.

In pledging to finance only small businesses, SBICs may qualify for US government-backed long-term loans. Although all SBICs will consider applications for funds from socially and economically disadvantaged entrepreneurs, it is only SSBICs which make all their investments in this area.

The SBIC program was created to provide financing in the critical $250,000 to $5 million range in the form of either loans of the type not generally made by banks, or equity investments not generally available from non-SBIC venture capital firms. SBICs only invest in small US businesses, companies that create almost all of the net new jobs in the country.

The program is a private-sector-led partnership with the US federal government. SBICs tend to be managed by experienced private-sector professionals. At least $5-10 million is required to start an SBIC, and must come from private investors. Additional capital is then potentially available to each SBIC through the US Small business Administration via the sale of SBA-guaranteed securities, but only upon approval of the SBIC via a rigorous evaluation. The private capital is at risk in its entirety before any taxpayer money is at risk. The SBA also regularly examines SBICs to ensure financial soundness and regulatory compliance.