Small Business Investment Company (SBIC)

Author:

Kevin Dowd

|
Read time:

11 minutes

Published date:

June 26, 2025

In 2024, the number of investors applying to be licensed as Small Business Investment Companies (SBICs) increased by nearly 300%. What is the role of SBICs in the private market, and why are they rapidly growing in popularity among investors?

What is an SBIC?

A SBIC is a type of private investment company—an investment fund—that can provide debt and/or equity financing to small businesses and startups. All SBICs are licensed and regulated through the Small Business Administration (SBA). Many different types of investment funds can and do register as SBICs, including venture capital, private equity, and private credit vehicles.

Like traditional private funds, SBICs raise some of their capital from traditional limited partners (LPs), who invest in SBICs for the purpose of generating a financial gain. Unlike traditional funds, SBICs are also eligible to raise additional capital from the SBA through government-guaranteed loans, which can be used as leverage to help boost a fund’s potential returns. These loans typically come in the form of debentures, a type of long-term debt instrument that is usually unsecured.

From a policy perspective, the purpose of the SBIC program is to stimulate private investment in small businesses. The SBA operates on the fundamental principle that small businesses have a critical role to play in building and maintaining a dynamic economy, with SBICs serving as a key tool for providing financial support and operational guidance to American entrepreneurs.

Since they frequently raise capital from the U.S. government, in the form of guaranteed loans, SBICs are more closely regulated than traditional VC, PE, or private credit funds, with specific reporting requirements and regulations around the types of companies they are allowed to back.

Eligibility for SBIC funding

In order to raise capital from a fund that’s managed by an SBIC, a small business must meet certain criteria related to its size, its location, its planned use for the investment, and other factors.

• Size: Eligible companies must meet the SBA’s definition of a small business. In most cases, this means companies with a tangible net worth of less than $24 million and average net income of $8 million over the preceding two years. Most manufacturing companies with fewer than 500 employees and less than $7.5 million in average annual receipts also qualify as small businesses. The SBA lays out specific size standards by industry for each industry described in the North American Industry Classification System (NAICS).

• Location: Eligible companies must be based in the U.S. If more than 49% of a company’s employees or tangible assets are located outside the U.S., it is ineligible for SBIC funding.

• Type of business: SBICs are restricted from investing in several industries or companies pursuing certain business models. These restrictions include real estate businesses, banks or other lenders, and companies related to gambling or speculation.

• Use of funds: Eligible companies must plan to use the capital they raise from an SBIC fund to support business growth in some way, such as supporting operations or financing some type of expansion. Companies cannot raise SBIC funding to support passive investments or pay out dividends to shareholders.

• Ownership: The vast majority of companies that raise capital from SBICs are privately held.

Benefits of an SBIC fund

For both fund managers and LPs, using SBICs to invest in small businesses can offer a few distinct advantages.

Perhaps the main benefit of investing through SBICs is the ability to use government-backed loans as leverage, which can lead to higher returns. A report by the Institute for Private Capital found that, from 2000 through 2020, SBIC funds outpaced comparable non-SBIC funds in key performance metrics like internal rate of return (IRR) and multiple on invested capital (MOIC).

Types of SBIC funds

The SBIC program issues a few specific licenses to different types of SBIC funds. These types of funds can vary in a few key areas, including the types of loans they can receive, the way they pay back those loans, and their investment strategy.

Standard debenture SBICs

The most common type of SBIC fund is a standard debenture SBIC. These funds primarily invest by raising government-backed debt capital in the form of debentures and then using that capital to make debt investments in small businesses.

Accrual SBICs

The primary difference between standard debenture SBICs and accrual SBICs is related to interest payments. While standard debenture SBICs make semiannual payments to service the loans they receive from the government, accrual SBICs aren’t required to make any payments on either the principal or the interest until the loan matures in full.

Reinvestor SBICs (fund-of-funds SBICs)

Instead of investing directly in small businesses themselves, reinvestor SBICs use the capital they raise to invest in funds managed by other investors, following a standard fund-of-funds model.

Non-leveraged SBICs

SBIC funds that do not apply for debt funding from the SBA and instead invest only the equity capital they raise from other LPs are called non-leveraged SBICs.

How to become an SBIC

In order to form an SBIC, an investor must apply for a license with the SBA. When reviewing these applications, the SBA looks at several criteria, including the applicant’s management qualifications, their investment track record, their strategic plan, and their proposed fund structure.

Application process

The SBA recommends that first-time applicants to the SBIC program conduct a pre-screening review to assess their initial suitability.

Costs and timeline

The costs of applying for and receiving an SBIC license varies depending on the fund’s management team, investment experience, and fund strategy.

SBIC reporting requirements

Because they invest capital that they receive from the federal government, SBIC funds are subject to a stricter regulatory and reporting regime than typical venture capital, private equity, or private credit funds.

Form 468

Funds licensed by the SBIC must submit both a Quarterly Form 468 and an Annual Form 468 to the SBA.

Form 1031

Each time they make a new investment, SBICs must submit an accompanying Form 1031, also known as a portfolio financing report.