Business Development Company – Definition

Cite this article as:"Business Development Company – Definition," in The Business Professor, updated June 8, 2019, last accessed May 25, 2020, https://thebusinessprofessor.com/lesson/business-development-company-definition-2/.

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Business Development Company (BDC) Definition

A business development company (BDC) is a company that provides capital or funding for small- and medium-size companies to grow. Companies that have no alternative source of funding often access BDCs. They are closed-end investment companies that help small and medium-sized companies grow at the initial stages of their development.

Most business development companies are publicly traded and have high dividend yields for investors. BDCs shares are traded on stock exchanges such as AMEX, Nasdaq, and others. Majorly, capital-seeking investors who have no alternative ways of obtaining financing use BDCs.

A Little More on What is a Business Development Company

Initially, provisions of the Investment Company Act of 1940 created business development companies but were later amended by Congress in 1980. Section 54 of the Act required that BDCs are registered. BDCs are not the same as venture capital fund, although they also provide venture capital or fishing for small and mid-sized businesses that are in the early stages of development.

BDCs are like closed-end funds that provide capital for small and medium-sized companies in the United States. BDCs are smaller and have unaccredited investors. They focus on financing private companies but sometimes provide capital for public companies that are at the early stage of growth or struggling with low volumes of trading.

BDC Qualification Requirements

In the United States, not all small and medium-sized companies can access funds from business development companies. There are certain requirements that qualify these companies for receiving capital from BDCs. The qualification fairness are as follows;

  • The firm must be a domestic company or domicile in the region.
  • The firm must be registered with the Securities and Exchange Commission.
  • Domestic companies in dire need of financing can access BDCs.
  • Private or public firms with a market value below $250 million can access funds from BDCs. BDC can invest the minimum of 70% of its holdings in such firms.

Investing in a Business Development Company

Usually, BDC investors are non-accredited investors who want to invest in startup companies. Investing in a BDC grants these investors investment access to private companies and a few companies. Private firms are typically hard to invest in but BDCs create this platform for investors. BDCs typically invest in illiquid securities.

BDCs are registered according to section 54 of the Investment Company Act of 1940, they are thereby regulated. Over 90% of the profit that a BDC makes must be distributed among shareholders who are also its investors. This is why BDCs are quite attractive to investors, they have high yield of dividends.

Difference Between Venture Capital Funds and BDCs

There is a distinction between venture capital funds and BDCs. While venture capital funds contain a limited number of investors who are usually accredited and high-ranking investors, BDCs are made up of unaccredited investors.

BDCs serve as alternative capital funding to venture capital funds. Venture capital funds are often available to wealthy individuals while BDCs are accessible by small and medium-sized private and public firms that are struggling with finances.

BDCs are also traded on major stock exchanges and are regulated.

References for Business Development Company

Academic Research on Business Development Company

The business development company solution, Boehm, S. B., & Krus, C. M. (2001). Venture capital, 34(4).

Promotion of private enterprise and citizen entrepreneurship in Botswana, Kaunda, M., & Miti, K. (1995). Development Southern Africa, 12(3), 367-377.

Venture Capital Formation and Access: Lingering Impediments of the Investment Company Act of 1940, Bristow, D. K., King, B. D., & Petillon, L. R. (2004). Colum. Bus. L. Rev., 77.

A decision tree approach for integrating small business assistance schemes,  Temtime, Z. T., Chinyoka, S. V., & Shunda, J. P. W. (2004). Journal of Management Development, 23(6), 563-578.

The rise and fall of venture capital, Gompers, P. A. (1994). Business and Economic History, 1-26.

BDCs: The Most Important Commercial Lenders You’ve Never Heard About, Beltratti, A., & Bock, J. (2018). The Journal of Alternative Investments, 20(4), 8-20.

Can Venture Capital Foster Innovation in Canada? Yes, but Certain Types of Venture Capital Are Better than Others, Fancy, T., & Overall, C. V. (2012). E-Brief. Toronto: CD Howe Institute. September, 2(9).

Business Development Companies: Cashing In on Private Equity?, Anson, M. (2004). The Journal of Private Equity, 10-16.

Shedding New Light on Business Development Companies, Boehm, S. B., Krus, C. M., Pangas, H. S., & Morgan, L. A. (2004). The Investment Lawyer, 11(10), 1-9.

Obtaining finance for high-technology ventures, Freyenfeld, W. A. (1983).

Funding translational medicine via public markets: the business development company, Forman, S., Lo, A. W., Shilling, M. J., & Sweeney, G. (2015).

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