Financing and Working Capital

The SBA’s Small Business Investment Company Program and your business

If your business is in need of additional capital, Small Business Investment Company (SBIC) funding could be right for you. 

Published: June 04, 2013
Updated: February 16, 2017

Venture capitalists often help businesses at the startup phase, but that's not the only time a business could use a financial lift.

If your business is in need of some expansion funding, but your startup days are well behind you, consider looking into the Small Business Investment Company (SBIC) Program. This program is run by the Small Business Administration (SBA), an organization that offers a number of resources and programs aimed at starting and growing small businesses.

Congress created the SBIC program for the SBA in 1958. And since the American Recovery and Reinvestment Act passed in 2009, the program has grown, offering much-needed capital to small businesses.

How the SBIC program works

Private equity firms, or investors in private companies, apply to get an SBIC license to invest in small businesses. Companies seek to become an SBIC because they can supplement the private equity capital they have to invest with SBA-provided debentures, or bonds, that they pay back at a low cost over a period of up to 10 years.

Typically, SBICs invest in businesses with an average net worth of $19.5 million or less for the last two years. "The funds typically do not feed cash flow deficits," says Tim Rafalovich, Senior Vice President and Alternative Equity Group Manager at Wells Fargo Community Lending and Investment. He added the vast majority of SBICs invest in companies with positive cash flow regardless of net worth. However, the SBA is creating a program for startup companies that will allow special SBICs to invest in companies that are not yet cash flow positive.

The SBA vets SBICs and conducts periodic investigations to review their investments and ensure that the recipients qualify as a small or small middle-market business. Each SBIC has its own criteria and application guidelines in order for a business to receive funding. The SBA maintains a directory of SBICs on its website.

The benefits of SBICs for small business

SBICs can provide businesses with three benefits:

  • Equity capital, or debt-free money

  • Long-term loans to be repaid with interest

  • Expert management assistance

In fiscal year 2014 SBICs provided $5.46 billion in financing to 1085 small business, according to Rafalovich.

Business owners should also keep in mind that an SBIC can have a say in the running of your business. However, SBICs typically only have board observation rights and unless covenants have not been triggered, they have limited influence over management decisions.

Preparing your business for an SBIC

Before a small business applies for SBIC funding, Rafalovich suggests examining the value the SBIC's management team could offer the business. "I’ve seen management teams bring oversight in a very particular way, I've seen them bring strategy, and I've seen them bring particular business contacts, as well as operational efficiency," he says. "In some circumstances, I've seen SBICs significantly help run a company."

Also, keep in mind that each SBIC has a different focus, so assess whether the SBIC aligns with your business. "You want an SBIC that's active with similar companies," Rafalovich says. "Some only work with high-tech manufacturing or healthcare, while other SBICs are generalists. Some have a very distinct initiative to increase jobs, and tend to like growth-oriented companies. Other SBICs have a distinct initiative to fund minority- and women-owned companies."

Currently, the top industries receiving funding from SBICs are manufacturing, business services, and transportation. A few industries including casinos, real estate developers, and oil and gas wells are excluded from receiving SBIC funding.

To learn more about your business's eligibility and finding the right SBIC, visit the SBIC page on the SBA's website.