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Is SBIC Financing a Good Fit for Your Business?

Is SBIC Financing a Good Fit for Your Business?

As a business owner with a growing business, it is important to be on the lookout for potential capital that can assist in that growth. While loans are available, they may not provide the right fit for your business in terms of long term growth. On the other hand, finding investors can be a time consuming process that may not yield results, while taking your time away from the actual growing of your business. Simply put, small businesses do not necessarily have the contacts to assist them in moving forward with an investment opportunity.

The Small Business Administration (SBA) provides an opportunity to access those investment funds through their SBIC program. This partners private and public funds, but focuses primarily on small businesses. These investment funds do have specific investment criteria that is governed by SBA regulations.

Is Your Business Eligible?

Since SBICs can only invest in small businesses, based on the size of your business, you may or may not be eligible. So what defines a small business? The business’ tangible net worth must be less than $18 million and average approximately $6 million in net income or less over the previous two years. Those two years are defined from the point of investment backwards. However, there are exceptions that are based on industry, so it is important to check the SBA website to determine what the limits are for your industry.

If your business is involved in foreign activities, then that may also make it ineligible. What are those activities that would fall under this category? These types of activities would include investments to support foreign operations or businesses that have more than 49% of their employees or tangible assets outside of the United States. Therefore, you want to be sure that you do not fall within either of these categories before you begin the process of applying for an investment from the SBIC.

There are also a few industries that do not qualify for SBIC investments. These include re-lender or re-investors, passive businesses, most real estate businesses, farmland, project financings and businesses that do not support the public’s best interest. However, if your industry does not fall into any of these categories and you are not involved in the type of foreign activities that would make you ineligible, then this may be an opportunity to fund your next stage of growth.

Is This Financing Right for You?

While you may be eligible for this type of financing, it may not necessarily be the right option for your business. The SBIC can provide the capital in a variety of ways, such as loans, debt securities, mezzanine debt with equity features and equity. The interest rates, however, may be significantly higher than what your business might be able to get with conventional financing. However, in many cases, the SBICs are capped at 19% for loans and 14% for debt securities. Keep in mind, not every SBIC will reach those maximum rates and they may be significantly lower.

Therefore, you need to do your homework and make sure that the rate you are being offered is competitive with the marketplace. However, as a mature business, this type of investment may be more effective than a traditional commercial loan.

SBIC Investment Profile

Just like any other investment fund, each of these SBIC investment funds has their own specific criteria, which is based on the SBA regulations that govern them. Based on their different profiles, they may choose to focus on a specific industry or specialty, as well as a geographical area, and the types and sizes of financings that they offer. However, the main consistency in their profiles is that mature businesses are more likely to be able to pay their interest rates, so these are the businesses that are most often targeted. If your business is not profitable as yet, but has a large income stream, you may still be eligible for investment, depending on the SBIC.

As you can see, if your business is ready to make the leap to the next level of growth or needs a significant investment for equipment purchases, then it might be worth considering an SBIC as an investment partner. Keep in mind, however, that each SBIC has its own investment criteria. Therefore, it may require some effort on your part to find the right SBIC for your particular business. If you choose to seek this type of financing, do your research on the SBICs to identify those funds that will provide the best fit for your particular type of business.

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