Small Business Investment Companies

Chair: Patrick Weston, Route 2 Capital Partners

Launched in 1958, the Small Business Investment Company (SBIC) Program has a long history of success helping small U.S. businesses access long-term, patient capital for growth and job creation. Administered by the U.S. Small Business Administration (SBA), the SBIC program utilizes the talent of experienced private investment fund managers to achieve critical public policy objectives. According to data compiled by SBA, as of 2024 the SBIC program has:

Deployed more than $130 billion of capital;
Made more than 194,000 investments in U.S. small businesses; and
Licensed nearly 2,400 funds.

Today, there are more than 300 licensed SBIC funds* representing $30+ billion in domestic capital. SBIA works closely with the SBA and with members of Congress to ensure the vibrancy of the program continues, and that it expands to underserved areas.

In August 2023, SBA implemented significant reforms to the SBIC program, creating two new SBIC licenses to expand the spectrum of private sector capital supporting U.S. small businesses**. The Accrual SBIC license is designed to support longer-term equity investments. The Reinvestor SBIC license aims to increase the geographic reach of the program and foster the next generation of fund managers.

Fund management teams that successfully complete the SBIC application process may access low-cost leverage up to two times the private capital they raise. These funds then invest in a portfolio of U.S. small businesses – creating jobs, fostering innovation, and fueling economic growth.

A 2017 Library of Congress study found that SBIC-backed small businesses created almost 3 million new jobs and supported an additional 6.5 million jobs over a 20-year period. Every one of these jobs represented a gain to the communities where they are located and to the broader regions from which they draw employees and provide goods and services. Moreover, these businesses have continued to succeed independently, growing into robust, sustainable mid-sized businesses that bring prosperity and employment to communities across the country.

Members of SBIA participate in industry councils for sector-specific updates on policy and regulatory matters and educational opportunities. The SBIC Council regularly convenes to discuss relevant issues and often participates in forums and discussions with SBIC program leaders at the SBA.

*As of June 30, 2023, there were 302 licensed and operating Debenture SBICs with private capital of $22.8 billion and $12.5 billion in outstanding leverage.

**Visit the 2023 SBIC Investment Diversification and Growth Rule page to find more information and policy summaries about the changes to the program.

SBIC FAQs

Who can obtain an SBIC license?

Professional investment fund managers of good character and with a proven track record of identifying and financing growth opportunities in small businesses. Applicants for SBIC licenses complete a rigorous screening and approval process by the SBA.

Joining SBIA provides the best resources available to help fund managers successfully apply for a SBIC license. SBIA also has a vast network of institutional limited partners who are experienced in deploying capital into SBIC funds.

What is the benefit of being an SBIC license holder?

SBIC license holders can leverage the capital they raise from private investors, up to $2 in government guaranteed debt for every $1 raised. The maximum amount of leverage that a fund can receive from SBA is $175 million, or three times regulatory capital, whichever is less. The maximum leverage for a family of related funds that are funds managed by a single management team, is $350 million.

Small businesses are able to access capital they otherwise could not access and are able to grow, hire more employees, upgrade technologies, and help the American economy grow.

SBIC investing v. bank lending

SBIC investing and bank lending are very different. SBIC capital can be in the form of debt, equity, or both. SBICs provide education, training, and professional guidance to their portfolio companies that banks generally do not provide. Banks are often only able to provide conventional lending to a small business after an SBIC has invested in a small business. SBICs provide long-term capital that empowers small businesses to survive and recover from the inevitable surprises that can happen in business. Banks and SBICs collaborate but offer different types of capital, so they do not compete.

Banks are partners, not competitors to SBICs. Banks are often only able to provide capital after a business has received SBIC capital because the SBIC capital changes the capital structure of the business and thereby makes it more “bankable.” Over 500 banks, ranging from small community banks to large banks, are investors in SBIC funds. Some banks own non-levered SBIC funds and other banks are forming their own internal SBIC units to provide equity capital that the banks cannot otherwise provide. If small businesses could access this capital from banks, they would get bank loans because there are thousands of banks and conventional bank lending is less expensive.

Why do LPs like investing in SBICs?

Small businesses are great growth engines and provide excellent returns. It is very difficult for larger venture or private equity platforms to invest in American small businesses so having platforms specialized in serving the small business market provides excellent returns, benefits the national economy, and are investments that LPs can be proud of. The vetting and licensing process for SBICs make LPs very comfortable about the performance record and character record of the fund managers they are backing.

Does the SBIC program cost the taxpayers money?

The SBIC program operates at a zero subsidy to the American taxpayer. In other words, taxpayer funds are not needed to support the credit cost associated with the SBIC program. SBIC leverage that is made available to SBIC license holders comes from government-backed debentures that are sold in the capital markets.

The SBIC Program provides growth capital to growing small businesses that in turn hire more employees, invest in capital improvements, and grow the economy. It is one of the most efficient, job-creating programs within the government. According to a 2017 Library of Congress study, only $35 in average administrative government costs were associated with creating each new job. (The leverage operates at zero subsidy, but there are still some administrative costs.)

SBIC investments are made in areas of the country and in industry sectors that are commonly overlooked by conventional venture capital and private equity. The overwhelming percentage of venture capital is invested in Northern California and the New York to Boston corridor. While SBICs do invest in those areas, SBICs invest most of their capital in places other than this investment footprint. For example, from 2014-2018, 22% of SBIC investments were in areas certified as Low-Moderate Income. Even SBICs that are primarily located in population centers regularly invest well outside of their local area, so the SBIC program helps move capital to underserved areas – both urban and rural.
A single SBIC will invest in many different small businesses. Unlike other government loan programs, when a single investment underperforms or loses money, only private capital is lost, not taxpayer guaranteed capital (leverage). The profits from the other portfolio investments cover the losses from the isolated underperforming investment(s). If the profits from the other portfolio investments are inadequate to cover all the losses, then the private investors’ capital is lost before SBA leverage is at risk. There is normally a large private capital cushion that would need to be exhausted before the taxpayer guarantees would be realized.

What accountability exists in the SBIC program?

There is extensive accountability built into the program.

Private capital being in first-loss position is a very effective accountability tool because there is no “gambling with other people’s money.” Private capital being in first-loss position is an important, built-in taxpayer safeguard.

The Small Business Administration (SBA) has reporting obligations that ensure the SBA is fully apprised of the health of the fund, and the funds receive independent audits plus SBA on-site examinations.

The SBA can cut off underperforming SBICs from accessing further leverage and can even require disgorgement if an investment does not meet the SBA’s statutory and regulatory requirements.

SBA can require an orderly wind down of the SBIC and limit SBIC fund managers’ compensation. In extreme cases, SBA can remove the fund managers.

Does the government own a portion of these small businesses?

The government does not invest in or own any portion of any small business or any SBIC fund. All SBIC investments are made entirely by the private sector via investing professionals without the government’s direct involvement.

SBICs invest in growing small businesses, then notify the Small Business Administration (SBA) which small businesses received capital after the investment is made. There are size standards and other basic requirements and taxpayer protections that must be adhered to, but government involvement stops there.

The government manages access to and guarantees a private sector credit facility but is not a “Limited Partner.” For SBICs accessing SBIC leverage, the leverage is in a more advantaged position than the private sector limited partners because the SBA leverage must be repaid before private investors are repaid.

This is a market-driven program designed to have successes and failures based purely on the success of the small businesses receiving investment.

The program is successful at creating jobs and growing small businesses because it allows the private sector to find the businesses with the greatest growth potential and direct capital to them.