Characteristics of Small Business Investment Companies
- Only enterprises with a net worth under $18 million, including all subsidiaries, affiliates and parent companies, qualify for SBIC funding. Further, their after-tax net income for the previous two years, averaged, must be less than $6 million. This makes SBIC funding ideal for start-ups that generally need approximately $250,000 in seed money and existing small companies that are seeking funding to expand but don't need more than $5 million in funding to complete their expansion projects. The providers of this funding are SBICs that have gone through the lengthy process of licensing under the SBA.
- Private investors seeking to form an SBIC must demonstrate their ability as venture capital fund managers with specific experience in certain industries. They must raise private capital to start the SBIC application process and demonstrate experience as principals in prior venture investments that had superior returns on investment. They must also demonstrate that there will be significant numbers of good investment deals presented to them for consideration. The SBA also looks at the group's history of working together and whether the investors have skills that would allow them to adequately advise their portfolio companies in all forms of business matters. Finally, the investors must demonstrate professional cash management experience in handling and protecting large amounts of money -- the SBA assists the growth of small business by guaranteeing loans, but it also seeks to reduce repayment risk by selecting only the most responsible and experienced recipients.
- The minimum private investment required to capitalize the SBIC is $5 million. For example, for the minimum size investment, the SBIC issues $10 million in 10-year debentures to the SBA, which the SBA guarantees, packages and sells to the public. Buyers of these SBA-guaranteed securities are usually large institutional investors, such as insurance companies, pension funds, mutual funds and investment advisers. The SBIC must make interest payments every six months and pay the full principal amount at maturity.
- The application process to form an SBIC consists of two parts. The first part is completion and submission of the Management Assessment Questionnaire (MAQ) followed by an interview if the SBA approves the MAQ. The second part consists of executing the legal agreements, attending SBIC regulatory training classes, depositing the money and reviewing by the Agency Licensing Committee. At the end of this lengthy process, the license either will be denied or granted.