Eakinomics: The Small Investment Firms Program

Thomas Wade wrote a very accessible introduction to the Small Business Investment Company (SBIC) program, cleverly titled, “The Small Investment Firms Program: An Introduction. “This Small Business Administration (SBA) program has been around for more than 60 years and has provided nearly $ 70 billion to small businesses in America through 166,000 investments, including funding for Apple, Intel and Tesla in their early days. SBIC can only invest in companies that meet the SBA’s definition of small business.

Here’s how the mechanics were put together. “The SBA provided funding (called leverage) to its SBICs through the issuance of unsecured loans (called debentures), and these SBICs would then invest in small businesses that they believed had potential for growth.” At first glance, SBICs look like venture capital funds that invest in promising companies, provided the taxpayer provides the money through the SBA. In fact, the funding structure is a bit more flexible: “SBIC investments can be made in a variety of ways, ranging from ‘direct’ debt without equity items (loans), to debt with equity items ( equity securities), or any combination of the above, with the interest rate charged by the SBA depending on the type of investment. Finally, there are limits on leverage and overall support: “For every $ 1 that SBIC raises in private capital, the SBA will incur $ 2 in debt, up to $ 1. $ 175 million cap. In this way, an SBIC with $ 50 million in private capital can access SBIC leverage of up to $ 100 million, allowing it to invest $ 150 million in qualifying small businesses. SBICs also benefit from a number of favorable legal provisions.

Now you might say, “This is all really interesting (or, if you’re under-caffeinated, not), but why do I care on March 10, 2021?” As Eakinomics readers know, one of the key policy responses to the COVID-19 recession is the SBA’s Paycheck Protection Program (PPP), which offers small business loans that can be canceled if used to cover a specified list of costs (including labor costs). Over time, there is growing concern that companies are unwilling to take on more debt and that the short-term nature of PPP will be a lag for small businesses in the future. In this context, the SBIC program appears as a potential vehicle to provide alternative financing to promising small businesses, including longer term support by professionals who can help a small business grow.