SBIC funds can make a significant impact on the overall viability and future course of small to mid-sized businesses (SMBs), which make up over 99 percent of all commercial enterprises in the United States.
The number of SMBs in this country has, however, decreased by a third since January 2020, in the wake of the pandemic and economic downturn. Many small companies are still struggling to achieve growth, despite increases in vaccinations and the lifting of many health mandates.
Before the pandemic, over 30.2 million small businesses provided 44 percent of all economic activity and created two-thirds of new jobs in the U.S. Nevertheless, they have to compete with large corporations for loans and grants to stay afloat. Stricter bank regulations leave many small enterprises out to dry because most traditional lenders favor larger companies, with their proven cash flow and favorable debt-to-income ratios.
Also, SMBs that have suffered interruptions in their cash flow and damage to their credit score because of the pandemic will have a hard time securing a bank loan to help them expand and achieve a larger share of their markets.
The strength of our economy depends on the success of SMBs, and small enterprises must get the growth financing they need to take their businesses to new levels, despite the economic downturn. As an alternative to bank loans, SMBs might look into the Small Business Investment Company (SBIC) Program.
The SBIC dispenses public dollars through intermediary investors to match those that private investment funds raise. This form of assistance can boost SMBs who could use a helping hand to get back on track and maintain their trajectory.
The SBIC Program
By the power of the U.S. Congress, the U.S. Small Business Administration’s (SBA) Office of Investment and Innovation initiated the SBIC in 1958. Using up to $4 billion each year, the SBA distributes licenses to SBIC private equity funds, venture capitalists, and other entities who use debts to invest in SMBs to help them achieve growth.
From the program’s launch through last December, about $108.3 billion in funding has been used in 186,412 financings to invest in companies like Apple, Tesla, Costco, and Federal Express. Since last September, the SBC has used about $18.5 billion in private capital funds to license over 300 SBICs with $10.5 billion of outstanding leverage. During the 2020 federal fiscal year, the agency used approximately $2.1 billion in private capital to license 12 first-time SBICs and 14 subsequent-fund SBICs.
Qualifications and Eligibility
To qualify for SBIC private equity or mezzanine funding, SMBs must first meet the SBA’s definition of a small business — i.e., at least 51 percent of its employees must be based in the U.S. and the company must be in an authorized industry. Small businesses might qualify if their after-tax income for the previous two years isn’t above $6 million and their total net worth doesn’t exceed $18 million.
Prospective SMBs can also consult the SBA’s size standards table to determine if they qualify based on their company size and annual receipts. Besides company size, companies can be eligible for SBIC funds if their profit-based business doesn’t dominate their nationwide industry. However, this last criterion does not have a clear definition.
The Potential Benefits for Small Businesses
Seeking SBIC funding can be a worthwhile endeavor, mainly because it provides a catalyst for a business to grow. The financing is relatively flexible, and the disbursement of money is rapid enough to save time that might otherwise go toward fundraising. These funds are also beneficial to companies that want to acquire financing or engage in management buyouts. It’s also an excellent vehicle to allow non-active owners to retire.
How the SBIC Process Works
Knowing the application process and weighing several factors will increase the likelihood of a business securing funding. First, the prospective SMB should become familiar with the SBIC investors operating in their sector and what kinds of companies they usually finance. This first step is an excellent way to narrow the search.
It’s also advantageous to know the lending practices of an investor or SBIC private equity fund the SMB is considering; they don’t all operate in the same way. It’s essential to take the time to figure out which SBIC best meets a company’s needs.
Ideal SBIC investors possess key characteristics that small businesses should look for. For instance, does the lender (such as a business development company, or BDC) value simplicity in its operations? In other words, do they make the process easy to work with and comprehend?
Also, does the BDC process, approve, and distribute funds in a timely manner? Flexibility is another important consideration, which means they should be able to offer various options for financing and repayment. Finally, the small business should know their approval rate to get an idea of their chances of getting funding.
Finally, the SMB needs to negotiate the best possible loan terms when conversing with the prospective SBIC. It’s important not to overlook such details as collateral requirements, equity participation, interest rate, and maturity during negotiation. A company should present its business plan in the strongest way.
There are activities impacting financing that take place behind the scenes. The BDC from which a business seeks funding has a license to create a subsidiary that functions as an SBIC. Each subsidiary provides an SBA-guaranteed debenture, a bond or debt instrument with the company’s past performance, instead of collateral, as backing.
Debentures have long-term fixed rates that are often lower than traditional lenders like banks. BDCs can create multiple SBICs and handle up to $350 million in debentures. Furthermore, subsidiaries can apply a maximum of $175 million in debentures on a two-to-one ratio to the capital they use to subsidize the SBIC.
SBIC mezzanine funds represent another type of investment, especially for small businesses that have limited equity. When SMBs are seeking funding from an investor that limits the amount of capital they invest, the business has to put up the difference. Mezzanine funds can help close this monetary gap and provide benefits to both investors and small businesses. This type of financing looks more like a form of stock than a loan.
Saratoga Investment Corp.: The Path to SBIC Growth Funding
As the primary drivers of the U.S. economy, small businesses need access to funding to achieve growth and sustainability. Securing the right financing, especially during an economic downturn, can prove difficult for many SMBs. The SBIC Program can offer small businesses a feasible alternative to bank lending.
Saratoga Investment Corp. provides the resources to make SBIC private equity funding and mezzanine funding a reality. The company’s experience, efficiency, and flexibility make it well-suited to assist SMBs in expanding their revenue and market share. In particular, Saratoga can help businesses with acquisition and growth financings, leveraged and management buyouts, recapitalizations, and transitional financings.
Saratoga typically works with SMBs in healthcare, technology, and SaaS (software as a service) because of their recurring revenue and significant growth potential. Companies with revenues between $8 and 250 million and EBITDAs of at least $2 million are well-suited to work with Saratoga.
Small businesses who value flexibility, rapid feedback, and are looking for financing alternatives can visit Saratoga Investment Corp. to review our investment profile and available options.