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Monday, October 25, 2010

SBA Small Business Investment Company Program

Robert Jay Dilger
Senior Specialist in American National Government

Oscar R. Gonzales
Analyst in Economic Development Policy

The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs to enhance small business access to capital; programs to increase small business opportunities in federal contracting; direct loans for businesses, homeowners, and renters to assist their recovery from natural disasters; and access to entrepreneurial education to assist with business formation and expansion. It also administers the Small Business Investment Company (SBIC) Program. Authorized by P.L. 85-699, the Small Business Investment Act of 1958, as amended, the SBIC program enhances small business access to venture capital by stimulating and supplementing “the flow of private equity capital and long term loan funds which small business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply.” Facilitating the flow of capital to small businesses to stimulate the national economy was, and remains, the SBIC program’s primary objective.

The SBA does not make direct investments in small businesses. It works with 307 privately owned and managed small business investment companies (SBICs) licensed by the SBA to provide financing to small businesses with private capital the SBIC has raised and with funds the SBIC borrows at favorable rates because the SBA guarantees the debenture (loan obligation).

SBICs pursue investments in a broad range of industries, geographies, and stage of investment. Some SBICs specialize in a particular field or industry in which their management has expertise, while others invest more generally. Most SBICs concentrate on a particular stage of investment (i.e., start-up, expansion, or turnaround) and identify a geographic area in which to focus. The SBIC program currently has invested about $15.0 billion in small businesses, with about $8.7 billion raised from private capital and $6.3 billion guaranteed by the SBA. In FY2009, the SBA guaranteed $787 million in SBIC small business investments, and SBICs provided another $1.06 billion in investments from private capital, for a total of about $1.85 billion in financing for 1,481 small businesses.

Congressional interest in the SBIC program has increased in recent years primarily because it is viewed as another means to stimulate economic activity, create jobs, and assist in the national economic recovery. However, there are disagreements concerning whether the program should target additional assistance to startup and early-stage small businesses, which are generally viewed as relatively risky investments but also as having a relatively high potential for job creation.

This report examines the structure and operation of the SBIC program, focusing on SBIC eligibility requirements, investment activity, and program statistics. It also examines legislation, including H.R. 3854, the Small Business Financing and Investment Act of 2009, H.R. 5554, the Small Business Assistance and Relief Act of 2010, and P.L. 111-240, the Small Business Jobs Act of 2010, which address the following SBIC-related issues: (1) the targeting of additional assistance to startup and early-stage small businesses, (2) the SBA’s management of the program’s financial risk and its processing of SBIC applications, and (3) whether the program’s financing levels are appropriate given the nation’s current economic circumstances