Small Business Investment Company – Definition

Cite this article as:"Small Business Investment Company – Definition," in The Business Professor, updated April 15, 2019, last accessed October 25, 2020, https://thebusinessprofessor.com/lesson/small-business-investment-company-definition/.

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Small Business Investment Company (SBIC) Definition

A small business investment company (SBIC) is a package under the administration of Small Business Administration (SBA) that offers financial supports to small and emerging businesses. SBIC is a privately owned investment company that offers venture capitals to small businesses in form of equity and debt. SBIC then becomes a point of resort for companies looking for startup capitals or venture funds as these are provided by SBIC. SBIC was established in 1958 given the passage of the Small Business Investment Act of 1958 but it can only function after being licensed by SBA.

A Little More on What is a Small Business Investment Company (SBIC)

Small business investment companies (SBICs) are organized and run by private investment firms to provide equity, loans or debt investments for small businesses. SBICs are able to provide venture capitals and financial supports for startups and small business by borrowing from the federal government, through funds borrowed at favorable rates.

The combination of SBICs owned capitals and borrowed capitals make up financial support they give to small businesses. However, before a SBIC can borrow government funds, it must have the guarantee of SBA.

Unlike venture capital firms, SBICs set reasonable requirements for small businesses they fund raise. SBICs however offer investment deals between $100,000 to $250,000.

SBICs can only be effective in executing their functions if they are licensed and approved by Small Business Administration (SBA), SBICs are then mandated to provide specific amount of leverage for a period. However, before they make investments, the issue a debenture (debt security) to small businesses they want to give funds to. Debenture allows principal payments and interests to be made on funds or loans given by SBICs. There is a standard timeframe that SBA allocate to debenture as well as charge on proceeds of debenture. SBA monitor and regulate standard debenture that SBICs issue when giving funds to small businesses.

References for Small Business Investment Companies

Academic Research on Small Business Investment Companies

How are small firms financed? Evidence from small business investment companies, Brewer, E., Genay, H., Jackson, W. E., & Worthington, P. R. (1996). Economic Perspectives-Federal Reserve Bank of Chicago, 20, 2-18. This paper draws evidence from the investments habits and activities of small business investments companies, SBICs in studying how small firms are financed. This include a study on contract theory with which SBICs operate and how they are funded. This study reveal that there is a high tendency for investments that generate tangible assets without too much management discretion not to be equity-funded but debt-funded. This paper further studies the connection between firms evaluation and firms growth.

Small business investment companies: financial characteristics and investments, Brewer, E. I., & Genay, H. (1995). Journal of Small Business Management, 33(3), 38. Many small businesses depend on SBICs for financial aids like equity markets, venture capitals, long-term debts and loans. This article examines the financial investments and financial characteristics that Small Business Investment Companies exhibit. It studies how SBICs make long-term debts accessible to small businesses, the limits of debts and equity sources of funds and the financial risks attributed to them. This article also investigates how SBICs offer financial reliefs to small businesses and the features of the investment types they offer.

Performance and access to government guarantees: The case of small business investment companies, Brewer, E., Genay, H., Jackson, W. E., & Worthington, P. R. (1996). ECONOMIC PERSPECTIVES-FEDERAL RESERVE BANK OF CHICAGO, 20, 16-30. The Small Business Administration (SBA) is responsible for licensing and regulating SBICs. SBA also ensure the provision of adequate capital for the establishment and growth of small businesses through SBICs. SBICs provide venture capital for small business through their own funds and the funds they borrow from the federal government. However, SBICs can only access government loans and guarantees through the approval of SBA. This paper examines the impacts of access to government guarantees on the performance of SBICs. This paper finds out that a poor performance of SBICs was recorded between 1986 and 1991 and this is due to high usage of government funds or guarantees.

Small Business Investment Companies: Licensing, Tax and Securities Considerations, Miller, J. D. (1980). Bus. Law., 36, 1679. This paper examines the licensing of Small Business Investment Companies, their tax as well as other securities considerations. According to the Small Investment Act of 1958 under which SBICs are formed, SBICs are solely concerned with investing in independent ┬ásmall businesses. Any other activities of SBICs different from this is a violation of the 1958 act. SBICs invest in small businesses through equity securities and other convertible debts they purchase from the federal government. This paper discusses licensing, tax and other securities considerations relevant to SBICs. It Al’s examines the legal rules governing them and their licensing procedures.

The security issue decision: Evidence from small business investment companies, Brewer III, E., Genay, H., Jackson III, W. E., & Worthington, P. R. (1996). Federal reserve bank of Chicago. Drawing evidence from the activities of SBICs, this paper examines security issue decisions that these investment companies are faced with, it examines the investment choices decided upon by SBICs. In order to explain security choices of SBICs, this paper focuses on asymmetric information factors and contracting theories of security choice. This study finds out that SBICs comply with contracting cost theories in the aspect of financing businesses. Businesses that generate tangible assets are more likely to be financed with debt than non-debt securities. Other security decisions of SBICs based on specific factors are also outlined in this paper.

New Horizons in the Regulation of Small Business Investment Companies, Seils, W. G., & Hodes, S. (1964). Bus. Law., 20, 921. This paper presents a study of the new horizons and regulation of Small Business Investment Companies (SBICs). SBICs have played significant roles in the formation and development of independent small businesses in the United States. To an extent, their investments in small businesses have helped to improve and stimulate national economy. Despite the impacts of SBICs on small businesses, as the economy nice ahead in 1960 and 1961, financiers and promoters saw the need for new horizons and regulation of SBICs. This paper extensively investigates these new horizons and regulation of SBICs.

Application of the Federal Securities Laws to Minority Enterprise Small Business Investment Companies Mesbics, Mendelsohn, S. H., & Cerion, R. J. (1970). Howard LJ, 16, 744. This paper examines how federal securities laws are applied to the monitoring of Small business investment companies, with a view to finding out whether the activities of SBICs are properly regulated or otherwise. This discusses the Investment Company Act of 1940 and the provisions of the act which are clearly stated in its numerous sections. The registration, diversification and fundamental policy binding the activities of SBICs are examined.  In addition, this paper discusses the unlawful activities of SBICs and the change of investment policy. Capital structure, dividends, proxies, loans, distribution and repurchasing of securities are also examined..

Small Business Investment Companies: A Venture Capital Structure of Choice?, Gordon, S. (1998). The Journal of Private Equity, 45-55. This journal examines venture capital structure of choice that small business investment companies exhibit. This journal dissects the SBIC program from the perspectives of both the venture capitalist and the U.S. government. It studies the impacts of equity funds and other venture capital funds provided by the government on the functionality of SBICs. The effects of SBA regulations and fees on fund or venture capital types are also examined. Vital aspects of SBICs explored in this journal are venture capital types, financial leveraging, capital investments and some other financial services that SBICs offer to independent small businesses.

Small Business Investment Companies, Bowman, B. A. (1961). Bus. Law., 17, 1005. This paper is a study of small business investment companies and their impacts on the development of small businesses. It examines SBICs from tax, growth as well as profit stand points. This study finds out that if small business investment companies are only experts in borrowing government securities and funds but not experts in issuing loans and investments debts to independent small businesses, they stand at loss. This paper further examines the notions of convertible debentures and dividends in small business investment companies. It also studies how small business investment companies make profits, the findings of these studies are presented in this paper.

Small Business Investment Companies and the Federal Securities Laws, Lese, H. V., & Rotberg, E. H. (1960). Fed. BJ, 20, 343. Small Business Investment Companies (SBICs) provide  ventures capitals and investment debts to independent small businesses through their funds and securities fund they borrow from the federal government.  This paper describes the relationship between small business investment companies and federal securities laws. It examines how lawyers and financiers comply with federal securities laws. This paper also investigates the legislative history of SBICs in relation with how the investment companies adhere to federal securities laws.

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