Whatever the industry, there comes a time when the small business owner will look into financing. Whether for working capital, acquisition or otherwise, it is essential that the business owner understand their available options as well as the impact of each on their capital structure.
A business plan and budget should be in place that includes how proceeds from debt and capital will be utilized as the business progresses. If its capital structure is weak, a business could miss opportunities or even fail to survive periods of stress. As renowned author and businessman Harvey Mackay once said, “If you fail to plan, you plan to fail.”
A business’s financial health is, of course, critical when taking advantage of future opportunities. One specific opportunity for growth is through the acquisition of other businesses. A great number of businesses will likely become available for acquisition within the next several years.
According to a February 2011 article in The New York Times, one business owner turns 65 years old every 57 seconds. The article also states that 9 million of America’s 15 million business owners were born in or before 1964. This indicates that a large number of businesses will come to market over the next five to seven years. Whether a business owner wants to acquire for growth or sell the company, a well-structured financial balance will be an important element in their success. So how can a business prepare for such opportunities?
Many business owners are aware of the Small Business Administration (SBA) loan programs in which local banks participate. Most are not aware, however, of the SBA’s Small Business Investment Company (SBIC) Program. The SBIC program was created to help fill the gap between the availability of growth capital and the needs of small businesses. The SBA will grant an SBIC license and supplement capital raised from private investors with access to low-cost, government guaranteed non-recourse debt.
The fund will generally be able to borrow two dollars for every dollar the fund has contributed from the SBA under the SBIC program. The SBA does not invest directly in small businesses; instead they rely on the licensed SBIC funds. These licensees are assessed by the SBA to ensure that they have the appropriate expertise and experience needed to make appropriate investments in qualified small businesses. An SBIC program is sometimes referred to as a public-private investment partnership since a licensee has their own money at risk in addition to the funds borrowed from the SBA.
With these two sources of capital, SBICs search across the United States for promising businesses in need of debt or equity financing. SBICs are similar to other investment funds in terms of how they operate and their pursuit of high returns. Unlike other funds, however, SBICs limit their investments to qualified “small” businesses as defined by SBA regulations: businesses with tangible net worth of less than $18 million and less than $6 million in net income over the previous two years at the time of investment. According to the SBA, Apple Computer, Whole Foods Market, Staples, Quiznos and Federal Express are just a few businesses to take advantage of early SBIC funding.
Since the program’s inception in 1958, SBICs have been supplying equity capital, long-term loans and management assistance to qualifying small businesses. The SBIC program is a multi-billion dollar, government-sponsored investment fund created to bridge the gap between entrepreneurs’ need for capital and traditional sources of financing. These funds will invest in businesses using loans or debt with equity features, or will make equity investments. The SBA does, however, put a number of restrictions on SBICs. SBICs are not allowed, for example, to grant loans related to a specific project (such as a large construction job), nor can they invest in real estate or any projects related to financing (such as banking). SBICs are also prohibited from investing in companies with more than 49 percent of their employees located outside the United States.