Why the SBA and SBIC are Important for Small Businesses

According to the Arizona Commerce Authority (ACA), there are more than 550,000 local small businesses in the state. They employ 44.5 percent of Arizona’s workforce. Those businesses have a significant impact on our state’s economy and the well-being of the families and communities who run them.

The Small Business Administration (SBA) was created in 1953 to recognize and encourage entrepreneurship in the United States. The formation of the SBA has enhanced the small business community and provided Americans with the financial support they need to kickstart and maintain their businesses.

The SBA is comprised of programs intended to benefit small businesses. One of those is the Small Business Investment Company (SBIC) program.

The SBA and SBIC have been instrumental in financing small businesses across the country for the last several decades.

What Is the Small Business Administration (SBA)?

The SBA is an independent agency of the federal government that protects the interests of small businesses and helps maintain the nation's economy. Since its inception in 1953, Americans have had the backing of the SBA anytime they go to start, build or expand their businesses. They assist small business owners with loans and even offer free counseling services.

From small loans to enabling significant equity investments, the SBA continues to provide the support small businesses need at various stages of their growth.

While the SBA is a key player in small business investment, it does not directly invest in the businesses themselves. It instead partners with programs like the SBIC to help businesses obtain financing.

What Is the Small Business Investment Company (SBIC) Program?

Originally known as the Small Business Investment Act of 1958, the SBIC program is comprised of privately-owned investment companies that provide equity and debt financing for small businesses looking for startup capital.

It stimulates and strengthens the economy by offering the sound financing small businesses need for their growth, expansion and modernization. The SBIC can offer unique and safe financing opportunities for small businesses because it is licensed by the SBA.

How Do the SBA and SBIC Work Together?

When the SBIC is ready to invest in a small business, they go back to the SBA for debentures (i.e., guaranteed loan obligations) to strengthen their funding. Although the SBA does not provide direct loans to small businesses, they do back loans offered through a lender like the SBIC.

Does the SBIC Program Impact Taxpayers?

The SBIC does not require taxpayer funds to operate, but some public funds are used for administrative costs that keep the program running effectively.

Who Benefits from SBIC Funding?

SBIC funds are typically for small businesses that can't get bank loans due to a lack of assets or inadequate credit. If a business doesn’t have the necessary cash flow to qualify for a conventional loan, SBIC funding may be an alternative way to obtain financing to start or grow the business. While these loans offer flexible financing options for businesses, they do come at a higher interest rate.

Who Is Eligible for the SBIC Program?

In order to be considered for an SBIC investment or loan, a business must:

1. Be designated a ‘small business’ by the SBA (meaning the business’s sales and equity are below $20 million)
2. Earn at least 51 percent of its revenue in the United States
3. Meet the requirements of an SBA-approved industry (the SBA prohibits loans for businesses in some industries, like real estate investing, gambling and multi-sales distribution, to name a few)

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