The Small Business Administration (SBA) was created by the United States government in 1958 to provide a clear and efficient path for small businesses to acquire capital. The SBA raises capital by selling SBA Guaranteed Certificates to various public and private investors. The capital acquired is then dispersed as debentures to licensed Small Business Investment Companies (SBIC’s), who in turn invest in small business portfolios with the intent to stimulate the flow of private equity capital and long-term loans to small businesses.
SMALL BUSINESS INVESTMENT COMPANY (SBIC)
SBIC’s contribute equity and/or debt capital to small businesses and may be viewed as small, regionally-focused private equity firms or mezzanine investors. Collectively, these firms provide HULT PRIVATE CAPITAL more than 2,100 unique businesses with investment capital annually.
SBIC’s undergo a rigorous SBA licensing program. To qualify, an SBIC firm must be privately managed, create for-profit investment funds, invest in small businesses and subject themselves to an annual regulatory audit. For this, SBIC’s may receive up to 300% additional leverage on their private capital from SBA-guaranteed debentures.
Only companies defined as “small” are eligible for SBIC financing. The SBIC Program defines “small” as a net worth less than $18.0 million and an average after tax net income for the prior two years less than $6.0 million. Further, there is a seven year maximum investment horizon for any SBIC investment. SBIC’s are also prohibited from investing in project finance such as real estate and motion pictures.
More than 90 percent of SBIC financing typically goes to operating capital (~50%) and acquisition capital (~40%). Other uses of investment capital include plant modernization, refinancing, new building construction, purchase of new equipment and machinery, land acquisition, marketing activities and research and development.
Approximately half of all SBIC financing is straight equity, about 25 percent is straight debt and the remaining 25 percent is a debt-with-equity structure.
SBIC’s are designed to leverage private capital with SBA debenture securities (up to three times the amount of private capital) to create a much larger pool of funds to invest. The SBA contribution increases the fund amount while reducing the time and effort required to raise larger pools of investment capital for a private fund.
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