What Is a Small Business Investment Company?

Definition & Examples of a Small Business Investment Company

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A small business investment company (SBIC)  is a private lending company that is licensed by the Small Business Administration (SBA). SBICs offer venture capital financing to small businesses.

Learn more about SBICs and how they work.

What Is a Small Business Investment Company?

A small business investment company is a privately owned and managed investment fund that is licensed, regulated, and backed by the SBA. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and capital investments in small businesses. The SBA matches SBIC funds at the rate of $2 for every $1 the SBIC puts in.

In addition to funding small business growth and more jobs, SBICs offer management expertise and assistance to companies. 

How Does a Small Business Investment Company Work?

The Small Business Administration provides funding to small business investment companies with particular knowledge of an industry or sector. Those investment companies, in turn, use that SBA funding plus their own money to invest in a promising small business.

An SBIC can provide capital to a small business using a few different methods.

  • Debt: The company may issue a loan to the small business in exchange for interest. A typical SBIC loan ranges from $250,000 to $10 million, with an interest rate between 9% and 16%. 
  • Equity: Some SBIC funding is in the form of equity or ownership in a business. In those arrangements, an SBIC may decide to invest in your business in exchange for a share of ownership in your company. Typical equity investments range from $100,000 to $5 million.
  • Combination: Other investments may involve a combination of debt and equity financing, typically with rates between 10% and 14%, and loan amounts up to $10 million.

SBIC funding might require giving up control over your business. The SBIC is allowed to control a business for up to 7 years in return for funding. That control might be different in each situation, so if you proceed with an application to an SBIC, ask about how they might want to exercise control over your business.

For example, an SBIC might see a lot of growth potential in a particular small business, so they agree to fund that company through an SBIC loan of $500,000 with an interest rate of 15%. (The $500,000 comes from both the SBIC's own funds and money it received from the SBA.)

The company that receives the loan uses it to expand the business and create more revenue. They pay back the SBIC according to the terms of the debt arrangement. Now the small business is successful thanks to the infusion of cash, and the SBIC has made a 15% return on its investment.

Steps to Finding an SBIC

If you're interested in finding a small business investment company to provide capital to your company, the SBA recommends these steps:

  1. Research possible investors: Look for SBICs whose investment goals fit with your small business plans. Check to make sure that the SBIC you want is likely to be investing at this time. Look for SBICs in your state first; many are local investors and they want to support local businesses and the local economy. You can download a directory of SBICs at the SBA's Investment Capital page to begin your search.
  2. Prepare your case: Create a business plan for your meeting with an SBIC. You'll be pitching them on why your business would make a good investment, so make it convincing and be able to back it up.
  3. Pitch your proposal: Present your business plan and proposal for SBIC financing. It helps to use your network to get an introduction and make a personal connection if possible. 

It's perfectly acceptable to present your business plan to more than one SBIC at a time.

Requirements for Small Business Investment Companies

To qualify for financing from an SBIC, your business must be: 

  • Based in the U.S. (meaning at least 51% of your employees and assets must be in the United States)
  • A small business as defined by the SBA
  • In an eligible industry

There's no one-size-fits-all standard for determining whether your business qualifies as a small business. You'll need to calculate your annual receipts and total employees and compare them to the SBA's size standards table, which details the size standards by industry. Or, you can use the SBA's size standards tool or ask a specialist.

If your business doesn't qualify, you may still be eligible for a different SBA loan, including their signature 7(a) loan

Key Takeaways

  • A small business investment company is one that is privately owned and licensed by the Small Business Administration to provide capital to small businesses.
  • SBICs usually offer debt financing, equity financing, or a combination of both.
  • Your small business has to meet eligibility requirements, including size and industry, in order to qualify.

Article Sources

  1. U.S. Small Business Administration. "Investment Capital." Accessed Aug. 22, 2020.