The U.S. Small Business Administration (SBA) can help startups and emerging companies obtain innovation funding through approved private sector partners known as Small Business Investment Companies (SBIC). To determine whether your company is eligible for SBIC funding and/or to discuss an SBIC outreach strategy, contact us at fedtrade@rothwellfigg.com
Small Business Investment Companies (SBICs) are licensed and regulated by the SBA and can provide a source of needed innovation funding.
The mission of the SBIC program is to enhance small business access to capital by 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…
Source: U.S. Small Business Administration
The SBA doesn’t invest directly into small businesses, but it does provide funding to qualified SBICs that have expertise in specific sectors and industries. Those SBICs then use their private funds, along with SBA-guaranteed funding, to invest in small businesses.
SBICs invest in small businesses through debt, equity, or a combination of both. Debt is a loan an SBIC gives to a business which must be paid back with interest. Equity is a share of ownership an SBIC gets in a business in exchange for providing funding. Sometimes, an SBIC invests in a business through both debt and equity. A typical SBIC investment is made over a 3-year period.
- Debt. A typical SBIC loan ranges from $250,000 to $10 million, with an interest rate between 9 and 16%.
- Equity. SBICs who invest in a startup or company in consideration of an ownership interest typically invest between $100,000 to $5 million. The percent of ownership interest varies and is negotiated between the parties.
- Debt with equity. This hybrid model of investing includes both loans and ownership shares. Loan interest rates are typically between 10% and 14%. Investments range from $250,000 to $10 million.
Eligibility. SBICs typically invest in mature, profitable businesses with sufficient cashflow. This is particularly true with respect to SBIC debt equity funding where the investor wants the assurance that the company has the future ability to pay the debt plus interest. There are, however, SBICs that also invest in early stage companies. Each SBIC has its own investment profile that takes into account several factors.
At a minimum, to be funded by SBICs, a company must:
- be a U.S. business with at least 51% of its employees and assets located in the United States
- qualify as a small business under SBA standards (generally 500 employees or less)
- be an improved industry (farmland, real estate, and finance are some of the industries that do not qualify).
The U.S. federal government also provides innovation funding opportunities through the America’s Seed Fund.
Recommendation: Before approaching an SBIC, identify (a) those SBICs that make investments in your technology or business sector, (b) whether the SBIC invests in companies that fit your development stage profile; and (c) the types of investments such SBICs make (debt, equity, and/or both).