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Growing businesses get a boost
from the SBA's venture capital arm
By Jennie
L. Phipps • Bankrate.com
 What
do Federal Express, Apple Computer, Outback Steakhouse, Intel and
America Online have in common? All got early help from a Small
Business Administration program that puts big money into small
business owners' hands -- the SBIC.
The letters stand for Small Business Investment
Companies: the SBA's vehicle for providing venture capital to small
businesses.
Under the program, the SBA licenses private
lenders who promise to lend only to small businesses. In return,
the licensees may qualify for government-backed long-term loans.
The program has been around since 1958, but
it really caught on in 1999. Based on preliminary year-end figures,
the program's 350 licensed SBICs -- banks, venture capital firms
and independent lenders -- set records, with almost 3,100 investments
worth more than $4.2 billion. That was up 30 percent over 1998 and
more than double the average for the previous five years, according
to the SBA.
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SBIC loans -- a snapshot
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Small business investment companies are private,
for-profit businesses licensed by the Small Business Administration.
They can be banks, venture capital firms or independent lenders.
The companies provide venture capital to qualifying
small businesses in startup and growth phases. To date, SBICs
have invested more than $13 billion in more than 78,000 small
businesses.
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| How the loans work |
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SBICs lend their own money, plus funds borrowed
at favorable rates with an SBA guarantee. The loans can be
either straight loans, or the SBIC may take up to 49 percent
ownership in the deal.
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| Who qualifies |
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Firms must have a net worth of $18 million or
less, with an average after-tax net income for the past two
years of $6 million or less.
All types of manufacturing and service industries
have been funded through SBICs. Specialized Small Business
Investment Companies focus on loans to firms owned by socially
or economically disadvantaged companies.
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| Finding the right SBIC |
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Research the SBICs to find one that specializes
in your area or industry. A good place to start is the SBA's
online
list.
SBICs are all different, so consider:
• Size of financing -- Each
SBIC sets its own dollar limits.
• Investment policy -- Most SBICs make both
equity investments and straight loans, but some prefer one
over the other.
• Industry preference -- SBICs tend to specialize
in a few industries.
• Geographical preference -- In general, SBICs
prefer to loan money to nearby firms.
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SBICs are private investment companies licensed
by the SBA. They loan their own private investment capital, but
they also may borrow additional money from an SBA-sponsored trust
at very low rates.
Staying
in control
Although some SBICs will consider startups, most look for companies
that are up and running, but need additional capital to expand or
otherwise maximize their potential.
Some SBICs are indistinguishable from conventional
venture capital firms, with one important difference: The SBA won't
let SBICs take more than a 49 percent interest in a company, so
the entrepreneur retains control.
SBICs typically loan between $100,000 and $5
million at an interest rate that can be high -- as much as 17 or
18 percent -- reflecting the fact that the money was first borrowed
from the SBA and must be paid back no matter what.
In the case of strict equity deals, the SBA
allows the SBICs to defer the interest owed until the SBIC takes
its profit. Then SBA gets 10 percent of that.
SBICs tend to be more risk-tolerant than many
banks or conventional venture capital companies. Many of them specialize
in an industry or a region that they understand very well, which
lets them take a second look at an entrepreneur whose current profit
picture isn't wholly rosy.
Finding
an SBIC
It's easy to find a local SBIC. Call the SBA at 202-205-6510, search
the SBA's online
list of licensed SBICs or contact the industry's trade group,
the National Association
of Small Business Investment Companies.
Go prepared with a CPA-prepared financial statement,
documented assumptions with a tidy summary page, personal financial
statements and tax returns for anyone owning more than 20 percent
of the company; a complete business plan; and the willingness to
give up part of your equity.
Practice your
presentation -- it will go a long way toward securing your financing.
Jay Ferguson, a partner in KlineHawkes
& Co., thinks his SBIC is pretty typical. The Los Angeles-based
firm looks for businesses that have been around for about two years
and have a product or service that is currently available and has
considerable promise but is making only minimal revenues.
"We look for companies that have the ability
to grow, he says. "If we value the company at $10 million today,
we hope that that company will be worth $100 million to $200 million
over the next five years."
Jennie L. Phipps is a contributing
editor based in Michigan
To comment on this story, please e-mail the
Bankrate.com
editors
-- Posted: Feb. 3, 2000
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