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SMALL BUSINESS INVESTMENT COMPANIES
Thirty-five years ago an entrepreneur looking for the capital to launch a small business had very few sources to turn to. There was no institutional resource to back up promising but untried ideas. Again and again, businesses with great potential for innovation failed - or never got off the ground.

To help solve this problem, Congress created in 1958, The Small Business Investment Company (SBIC) program. SBICs, licensed by the Small Business Administration, are privately organized and privately managed investment firms. They are participants in a vital partnership between government and the private sector economy. With their own capital and with funds borrowed at favorable rates through the Federal Government, SBICs provide venture capital to small independent businesses, both new and already established. Substantially all SBICs are profit-motivated businesses. A major incentive for SBICs to invest in small businesses is the chance to share in the success of the small business if it grows and prospers.

WHO BENEFITS FROM THE SBIC PROGRAM?
Small businesses qualifying for assistance from the SBIC program are able to receive equity capital, long-term loans, and expert management assistance. Venture capitalists participating in the SBIC program can supplement their own private investment capital with funds borrowed at favorable rates through the federal government. Most important, the U.S. taxpayer benefits. Tax revenue generated each year from successful SBIC investments more than covers the cost of the program. The SBIC program also provides the taxpayer with more job opportunities since SBIC-financed small businesses are proven job creators.

PRINCIPAL ADVANTAGES TO THE SBIC
An SBIC begins with people who have venture capital expertise and capital, and who want to form a venture capital investment company. By law, an SBIC can be organized in any state, as either a corporation or a limited partnership. Most SBICs are owned by relatively small groups of local investors. Many, however, are owned by commercial banks. Some SBICs are corporations with publicly traded stock, and some are subsidiaries of corporations.

GOVERNMENT LEVERAGE
An SBIC in good standing, with a demonstrated need for funds, may receive leverage (borrowed funds) equal to 300 percent of its private capital. However, in no event may any SBIC draw down leverage in excess of $90.0 million.

To obtain leverage, regular SBICs issue their debentures which are guaranteed by SBA. Pools of these SBA guaranteed debentures are sold to investors through a public offering. Under current procedures, the debentures have a term of five or ten years. The rate of interest on the debenture is determined by market conditions at the time of the sale.

LOANS
SBICs can make long-term loans to small business concerns in order to provide them with funds needed for their sound financing, growth, modernization, and expansion.

An SBIC may provide loans independently, or in cooperation with other public or private lenders. SBIC loans to small business concerns may be secured, and should be of reasonably sound value. Such a loan may have a maturity of no more than 20 years, although under certain conditions the SBIC may renew or extend a loan's maturity for up to 10 years.

DEBT SECURITIES
An SBIC may elect to loan money to a small business concern in the form of debt securities - loans for which the small business concern issues a security, which may be convertible into or have rights to purchase equity in the small business concern (often called a "warrant"). These securities may also have special amortization and subordination terms.

EQUITY SECURITIES
An SBIC may provide equity capital to small business concerns, and may do so by purchasing the small business concern's equity securities. The SBIC may not, however, become a general partner in any unincorporated small business concern, or otherwise become liable for the general obligations of an unincorporated concern.

SIZES AND TYPES OF BUSINESSES
SBICs may invest only in qualifying small business concerns or, if the SBIC has temporary idle funds, certain short term instruments (Federal Government securities, insured S&L deposits, CDs, and demand deposits). SBICs may not invest in the following: other SBICs, finance and investment companies or finance-type leasing companies, unimproved real estate, companies with less than one-half of their assets and operations in the United States, passive or casual businesses (those not engaged in a regular and continuous business operation), or companies which will use the proceeds to acquire farm land.

CONTROL
An SBIC is not permitted to control, either directly or indirectly, any small business on a permanent basis. Nor may it control a small business in participation with another SBIC, or its associates. In cases of inordinately high risk, the SBA may allow an SBIC to assume temporary control in order to protect its investment. But in those cases the SBIC and the small concern must have an SBA- approved plan of divestiture in effect.

OVERLINE LIMITATIONS
Without written SBA approval an SBIC may invest no more than 20 percent of its private capital in securities, commitments, and guarantees for any one small concern.

PROHIBITED REAL ESTATE INVESTMENTS
An SBIC may not invest in farm land, unimproved land, cemetery subdividers or developers, or any small concerns classified under Major Group 65 (Real Estate) of the SIC Manual, with the exception of subdividers and developers, title abstract companies, real estate agents, brokers, and managers. Investment in real estate related businesses is limited to one third of the SBIC's portfolio, and combined investment in real estate related activities (building contractors, hotels, and lodging places, etc.) is limited to two thirds of an SBIC's portfolio investments.

PROHIBITED RELENDING, REINVESTING
SBICs may not provide funds for a small concern whose primary business activity involves directly or indirectly providing funds to others, purchasing debt obligations, factoring, or leasing equipment on a long- term basis with no provision for maintenance or repair. However, SBICs may finance Disadvantaged Concerns engaged in relending or reinvesting activities (except agricultural credit companies, and those banking and savings and loan institutions not insured by agencies of the Federal Government).

PROCEEDS OF FINANCING
In general, investment funds used to purchase securities must go directly to the small business concern issuing the securities. They should not be used to purchase already outstanding securities such as those on a stock exchange, unless such a purchase is necessary to insure the sound financing of a small concern, or when the securities will be used to finance a change of ownership. The purchase of publicly offered small business securities through an underwriter is permitted as long as the proceeds of the purchase will go to the issuing company.

MINIMUM PERIOD OF FINANCING
Loans made to and debt securities purchased from small concerns should have minimum terms of one year. The small concern should have the right to prepay a loan or debt security with a reasonable penalty where appropriate.

 
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