How Do You Get a Loan From an SBIC?

The Small Business Administration (SBA) is well known to many business owners for its loan guaranty programs. You can usually go to your normal bank and get a loan you otherwise wouldn’t have qualified for because the SBA guarantees a portion of it.

But what about businesses that aren’t bankable? Bank loans with SBA guarantees are meant for businesses that can’t qualify for a conventional bank loan, but they still have fairly strict underwriting standards. If your business is losing money, has negative equity, or is a startup, you’ll have a hard time finding a small business loan, even if it has an SBA guaranty.

That’s where Small Business Investment Companies (SBIC) come in.

Overview: What is a small business investment company (SBIC)?

SBIC funds occupy the space in finance traditionally called mezzanine financing. Mezzanine debt usually has less security (collateral) than bank loans or issued bonds and charges a higher interest rate to compensate. Because of this, mezzanine loans usually go to companies that can’t get better loans with lower rates because they don’t have the assets to pledge as collateral or the cash flow to service debt.

The SBIC program allows these funds to either invest equity or debt into troubled businesses without having to commit the full investment amount.

How does the small business investment company (SBIC) work?

The SBIC fund contributes about a third of the investment as equity and the SBA guarantees a loan to the SBIC fund for the remaining amount. The SBIC then makes the payments on that loan over ten years.

SBIC licenses are relatively scarce -- only 300 total funds are licensed in the U.S. right now.

There are two types of SBIC funds: levered and unlevered. Levered funds function in the way described above, borrowing a portion of the investment, which the SBA guarantees.

Unlevered funds still have to register and be licensed with the SBA, but they use no debt in their investments. You may think this makes them no different than a run-of-the-mill private equity or mezzanine fund, but there is one key difference. Banks can get CRA credit by investing in SBIC funds.

The Community Reinvestment Act (CRA), first passed in 1977, requires banks to make a certain amount of loans and investments in low-income communities and small businesses that would otherwise not be bankable.

When I worked for a community bank, we had investments in loan pools similar to SBIC funds and also in a certified company that made loans to general contractors that built low-income housing. SBIC funds are a great option for banks because if they choose a good fund, they can get the CRA credit, with a high return on investment.

Is your small business eligible for the SBIC program?

SBIC regulations dictate your business must jump through these three hoops to be eligible for a loan or investment from an SBIC fund:

1. Be a U.S. business: At least 51% of your revenues should come from the United States.
2. Be a small business: Your business must be designated by the SBA as a small business. If your business’s sales and equity are below $20 million, your business is probably considered small by the SBA. You can make sure with the SBA’s tool on this page.
3. Be in an approved industry: The SBA prohibits some industries. Generally, these deal with finance (real estate or lending), farming (use the USDA), and things seen as unseemly (prurient or alcohol based).

3 benefits of finding an SBIC

Here are the primary benefits to working with an SBIC.

1. Growth

The reason most small businesses petition a private equity or venture capital fund is to grow. If you’re short on working capital and can’t keep up on demand or need a crucial new piece of equipment, SBIC loans may be available if bank loans aren’t.

Banks have to be conservative with their lending. Each time the economy crashes and banks have to be bailed out by the government, the FDIC, Federal Reserve, and other government bureaucracies manned by the wrong men in black (the ones who you wouldn’t want to talk to at a party) put more restraints on bank lending.

SBICs have their own set of regulations, but they’re far more lenient than the moat filled with mutant alligators than banks have to deal with.

2. Become bankable

It takes only one or two screwed up projects to set your business back. If you stretch and finance new equipment or a ton of raw materials and the job falls through, you could be left holding the bag. When this happens, if you have negative equity on your balance sheet, banks may deem you unbankable.

An investment from an SBIC will increase your cash balance and could lift your equity balance enough to make your business attractive to banks again.

It’s a good thing to be attractive to banks. They have the lowest rates and put severed horse heads in people’s beds only on very rare occasions.

3. Consulting

Most SBIC funds have a specialty. Some are industry focused, some are people focused (e.g. minority-owned businesses), and some are geographic. Part of the reason SBIC funds exist is to assist business managers.

Fund representatives should have experience in your industry and their financial professionals should be able to help you build a better budget, project financials, and manage working capital.

How you can find an SBIC

Here’s how you can find an SBIC fund that may be interested in your company.

1. Talk to your banker

Many investors in SBIC funds are banks. Talk to your business banker (even if you’re not “bankable,” you still need to put your deposits somewhere) and see if your bank is invested in a fund. If it is, get a review on it, because that fund is likely focused in your geographical area and is probably a good place to start.

2. Use the SBA directory

The next stop is at the SBA’s directory of the 303 licensed funds. Make sure to filter by industry and state to begin with and call funds that show that they are investing now. New investments are usually between $100,000 and $250,000.

Should you pick SBIC?

A main goal in business should be to get to where your business is self-sustaining: normal sales are enough to provide working capital for operations, and your balance sheet is pristine enough to get low interest bank loans for big expansion projects.

Most businesses aren’t quite there. And when your business is floundering, or you just haven’t hit your stride yet, it’s a key management responsibility to be open to any funding sources. SBIC loan funds can be the ideal combination of funding and mentorship.