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  • Writer's pictureAndre Watson

SBA rolls out changes to multibillion-dollar investment program

SBA is making several changes to the Small Business Investment Company program, including some to increase participation.

The Small Business Administration has finalized a series of changes to its Small Business Investment Company program, and it’s encouraging companies to apply.

Starting Aug. 17, private market fund managers can apply for two new SBIC licenses, an “accrual SBIC” and a “reinvestor SBIC,” to help expand the number of businesses participating and reach more underserved businesses.

“By strengthening, diversifying and expanding our network of SBIC-licensed private funds, the reforms will help fill funding gaps and unlock potential in underserved small businesses, innovative startups and businesses developing technologies critical to national security,” said SBA Associate Administrator for Investment and Innovation Bailey DeVries in a press release

The rule, first proposed in October of 2022, was aimed at streamlining the program and encouraging wider adoption. That included the accrual option, a new type of debt that better aligns with the cash flows of long-term equity-oriented funds. Previous forms of debt offered by the SBA beyond the standard one have either gone unused or have suffered losses.

The SBA also revised its existing guidelines that barred SBICs from investing in re-investors except under specific circumstances. The SBA also modernized its application process to lower costs and administrative barriers.

How does the SBIC program work?

Investment firms apply for and are accepted into the SBA’s SBIC program after an agency review, and are then eligible for low-interest loans to match their own private fundraising to invest in small businesses — ideally, underserved small businesses. Established in 1958, the SBIC program has ultimately led to early-stage investments in FedEx, Apple, Costco, Intel, Tesla, Whole Foods and more.

The SBA can invest up to $4 billion per year in these SBICs, with the money then being distributed to small businesses in the form of investment rounds and financing.

Alan Roth, a partner at law firm Winston & Strawn LLP, who specializes in SBIC licensing, said earlier in the year the program has, for relatively few dollars, boosted small businesses around the country and at no cost to taxpayers.

“Part of the Biden administration's initiative is to provide capital to small businesses and businesses that would otherwise not have access to capital,” Roth said at the time. “I truly think that the program really helps small businesses to continue to operate and to grow. It's truly one of those unknown gems that are out there that are supported by both Democrats and Republicans.”

What are the guidelines for SBICs?

There are a number of rules SBICs must follow, including not being able to invest in companies that have a net worth of greater than $24 million or an after-tax income of $8 million, although those amounts can vary for some industries.

There is no mechanism for business owners to apply for this type of financing. That's because the money is overseen by investment firms that make their own decisions on investments and use their own networks to identify potential businesses — more in the style of venture-capital firms.

They also tend to be larger investments than the SBA’s more typical 7(a) or 504 lending programs.

How much money does the SBIC program have?

The SBIC program has expanded over the years, from about $15.8 billion to about $22 billion of total regulatory private capital at the end of fiscal 2022. The total amount of capital invested in the program from both the SBA and private entities stood at about $38 billion at the end of fiscal 2022, up from $34 billion at the end of fiscal 2021 and $30 billion at the end of fiscal 2018.

Overall, the total number of operating SBICs stood at 308, according to data from SBA’s end of fiscal 2022 report. That number has remained relatively stable over the past few years.

And the number of financing events by SBICs is on the rise, too, growing from about $5.5 billion in fiscal 2018 to $7.8 billion at the end of fiscal 2022 — and up 11% over fiscal 2021.

Last year, SBICs invested $8 billion in more than 1,500 companies, the SBA said.

SBA's other loan program changes in 2023

The SBA has also made a number of changes to streamline its 7(a) loan program — and bankers say it's made the loan process faster, while also creating a few new headaches. That includes fewer forms, but also the potential for new fees.

It is also separate from a series of changes the SBA recently announced for its disaster lending program, which dramatically boosted loan sizes and extended deferment periods for homeowners and business owners alike.

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