What is a Small Business Investment Company?

A small business investment company, also known simply as an SBIC, is a privately owned company that generates profits by investing in small companies that are deemed to have potential to earn a decent level of return. In some nations, companies of this type must be registered with a governmental agency that oversees and protects small businesses that are based in a particular country. When this is the case, the small business investment company must comply with specific regulations in order to participate in any matching fund program that the government agency may make available to small businesses.

In the United States, the Small Business Administration, or SBA, often oversees the efforts of a small business investment company. This type of arrangement was first introduced in 1958, and makes it possible for privately held companies that want to invest in small businesses to participate in a working partnership with the government via the SBA. In order to participate, the investment company must be licensed by the SBA, and must meet all the qualifications specified by that agency. The benefit is that the SBIC can not only use a portion of their own capital to invest in a given company, but also borrow funds from the government at extremely competitive rates. This approach is said to help stimulate the establishment of small businesses and aid them in staying afloat while they grow a clientele and eventually reach profitability.

As with most investment strategies, the idea behind a small business investment company is to earn a profit. To that end, not every small business will be attractive to a given SBIC. Generally, the small business must have a solid business plan, exhibit the ability to produce and sell quality products, and show indications of being able to achieve a certain level of growth within a projected period of time. When a government entity is involved in the process, the small business must also comply with any criteria established by that agency as well as meet the qualifications of the SBIC.

In the best case scenario, a small business investment company identifies a new or existing small business that demonstrates significant promise for earning a return. The SBIC then works with that small business to qualify for the extension of cash that is used for expansion in some manner. When and as possible, matching funds from the government are also obtained, sometimes with the investment company held liable for repaying of those funds. The return realized by the SBIC may be in the form of stocks in exchange for the infusion of venture capital, with the returns from those shares eventually making the deal profitable for all concerned.