SBICs

Small Business Investment Corporations (SBICs) When the SBA was established in 1953, attention was directed to the long term debt and equity financial requirements of the small business; however, no governmental action was taken at that time. Finally, in 1958, the Federal Reserve completed a study, concluding that the banks and the SBA were satisfactorily meeting the short term and intermediate term debt requirements of the small business but that the small business was encountering an ever increasing need for longer term loans and equity financing. As result, SBICs were established as private profit seeking companies to be regulated by the SBA. As a means of encouraging private individuals or institutions to initiate these organizations, government loans were to be granted on favorable terms and tax advantages were offered.

The objectives and the operational philosophies of the various SBICs are extremely dissimilar, making it difficult to describe SBICs in a general sense. However, a basic classification does exist in terms of captive and noncaptive SBICs, in which the management of a captive SBIC is dictated by the objectives of a parent organization, usually a bank. In contrast, the noncaptive SBICs operate independently, with ownership ranging from several private individuals or institutions to a broadly based public.

Most SBICs are interested in equity participation via convertible debentures. Such securities generally carry a five to 20 year maturity date. The interest rates are quite divergent, depending on the company's growth potential. The size of loans is limited by several factors, including the willingness of the SBIC management to participate in the financing being requested. In addition to the SBIC's discretion in extending the loan, the SBIC is prevented by regulation from investing more than 20 percent of its capital in a particular venture. Also, the SBIC is not permitted to develop a majority interest in an organization except as a result of a violation in the terms of the loan.