What if the amount of money you need is more than what the bank will lend you, even with an SBA-backed loan? Licensed and regulated by the SBA; Small Business Investment Companies (SBIC) fill the debt and equity investment niche between straight lenders and venture capitalists. Investments by SBICs have fostered the growth of companies including Federal Express, Intel, America Online and Outback Steakhouse.
SBICs use their own capital, plus funds borrowed from the federal government to provide small companies with long-term, fixed-rate loans that are guaranteed by SBA. To qualify, your company must have a net worth of less than $18 million and average after-tax earnings of less than $6 million for the past two years.
SBICs tend to have greater flexibility in terms of financing options, which results in loans tailored to the needs of the individual’s small business concern. In addition, SBICs are more risk-tolerant than banks or traditional venture capitalists. To offset this risk, and since the nominal interest SBICs charge is competitive (and often less) than other lenders, SBICs attempt to earn this extra return by sharing in the equity of the borrower.
This often takes the form of indirect ownership in the form of warrants to purchase common stock or notes that are convertible into common stock. In other cases, SBICs will acquire a direct equity interest in the common stock of the borrower. Through this equity participation, most SBICs seek to earn a rate of return on investment somewhere between the interest rate charged by finance companies or SBA loans and the very high target rates of return sought by traditional venture capitalists.
SBICs are restricted from owning more than 49 percent of one company and it is rare for an SBIC to have that large of an ownership. This allows a small business the benefit of interested equity investors without relinquishing control.
Most SBICs are interested in all types of businesses, while others like to invest in specialized industries. Remember, like other funding options, you will need a strong business plan to approach SBICs. You can find a directory of SBIC licensees at www.sba.gov/inv.
Allen E. Fishman founded The Alternative Board® (TAB), the world’s largest franchise system providing advisory board and executive coaching services to business owners, Presidents and CEOs. TAB’s worldwide business advisory network operates in over 1,000 cities in the United States, Canada, the UK, and Venezuela.
Fishman is also the author of several books in which he shares his business insights to help business owners, including two best-sellers: 7 Secretsof Great Entrepreneurial Master: The GEM Power Formula for Lifelong Success(McGraw-Hill, 2006) and 9 Elementsof Family Business Success: A Proven Formula for Improving Leadership &Relationships in Family Business (McGraw-Hill 2008).
0 comments:
Post a Comment