When the banks reject you; SBICs may have what you need.

Author:Rose, Ronit Addis
Position:Small Business Investment Companies - Finding Money

When the Banks Reject You

SBICs May Have What You Need

GETTING FINANCING FOR SMALL businesses is tough these days, whether you're just starting out or running an ongoing venture that needs an emergency infusion of cash.

There are plenty of sources, of course: venture capital, angels, and bank loans. But these have their drawbacks: Venture capital tends to shun risky start-ups; angels can be hard to locate and their source of money is often tenuous. Banks are everywhere, but it takes time to build a relationship to the point where they'll give you a loan on reasonable terms -- and even then, they'll probably insist on collateralizing it with all your business assets, and perhaps your personal assets as well.

This is where Small Business Investment Companies come in. SBICs, created in 1958, are private investment firms licensed by the Small Business Administration to provide money to small businesses.

SBICs, which can be organized as limited partnerships, corporations, or even as bank subsidiaries, have a minimum of $1 million in capital. An SBIC can borrow up to four dollars from the SBA for each dollar of private capital it has. It then makes loans or equity investments in small businesses that meet its investment criteria, and earns money on the spread or on future stock sales or leveraged buyouts.

The four types of SBICs are:

* Bank affiliates, which tend to be highly capitalized and tend to make large equity investments in small businesses that have established products as well as sales;

* Subsidiaries of venture capital or other financial companies, which often blend debt and equity financing, such as a loan with stock options warrants, or ask for straight equity;

* Independent SBICs and units of nonfinancial companies, which tend toward riskier, higher-yield commitments of both debt and equity;

* Publicly traded SBICs, which do both debt and equity financings.

In addition, Minority Enterprise Small Business Investment Companies also offer financing programs. These, created in 1969 by an amendment to the Small Business Investment Act of 1958, are dedicated to financing minority-run firms. They tend to do smaller debt financings, from $100,000 to $200,000. Eligible groups for MESBIC financing include blacks, Hispanics, Asians, Vietnam veterans, and native Americans.


Unlike banks and other sources of financing, SBICs rarely dawdle...

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