SBICs (Small Business Investment Companies) . . .

are lending and investment firms that are licensed by the U.S. federal government to make loans to and invest in qualifying small businesses. The licensing, which is administered by the SBA, enables these firms to borrow from the federal government to supplement the private funds of their investors. For example, a privately owned and operated SBIC with $10 Million of its own capital might borrow up to an additional $30 Million from the U.S. government to increase its funds available for investment to $40 Million.

In addition to private firms, many banks use the SBA licensing procedure to create self-funded SBIC affiliates that enable them to make equity investments they would otherwise be precluded from making under existing banking laws. Many of these SBICs do not borrow from the SBA to supplement their funds available for investment. These are sometimes referred to as unleveraged SBICs.

Some SBICs engage only in making long term loans to small businesses or invest only in specific industries. Most SBICs, however, are organized to provide long term loans and equity investments in a wide variety of small businesses. Only firms that meet the definitional requirements of a 'small business' according to the SBA's rules qualify to receive funding from and SBIC. For most industries, this requires a company to have a net worth of less than $18 Million and average net income over the preceding two years of less than $6 Million. Some industries have other standards. Current standards can be reviewed on the SBA's web site at

www.sbaonline.sba.gov/financing.

In practice, leveraged SBICs usually require that a significant part of their investment in a company be in the form of loans or income-producing securities. This is because the majority of the funds they invest are borrowed moneys on which they have to pay interest and repay principal. For the same reason, may leveraged SBICs avoid earlier stage investments where the risks of nonpayment are greater.

Nonetheless, SBICs, both leveraged and unleveraged, represent a valuable source of funds, particularly for later stage companies whose prospects are more secure. If the prospects are secure enough, an SBIC will sometimes invest in a company that offers a more moderate potential for growth than might be required to attract a more traditional private venture capital firm. See: CDCs (Community Development Corporations), SSBICs (Specialized Small Business Investment Companies), Venture Capitalists.