Small Business Investment Company (SBIC)

Author: Kevin Dowd
Read time: 11 minutes
Published date: 26 June 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?

Small businesses and other young companies often raise outside funding to help support their growth or otherwise finance their operations. Small Business Investment Companies (SBICs) can be a critical source of that funding for U.S.-based companies that meet certain criteria.

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. The use of leverage allows investors to write larger checks than they would be able to with equity alone. 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).

In addition to improved performance, access to this sort of debt capital means that managers typically spend less time fundraising for an SBIC fund than a traditional VC or PE fund. This can allow investors to spend more time with their investments and help them deploy capital more quickly. SBICs are also exempt from both standard SEC registration and the Volcker Rule.

Another major benefit for fund managers is that SBICs are able to raise capital from banks, which are not legally permitted to invest in traditional private funds. For fund managers, this ability to access a potential new source of capital may be especially attractive considering the tightening of the fundraising environment that has occurred across the private markets since 2022.

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. The interest on these government-backed loans is semiannual, meaning that SBICs make two interest payments per year. Most loans issued to SBICs have a standard 10-year term.

Accrual SBICs

The primary difference between standard debenture SBICs and accrual SBICs is related to interest payments. While standard debenture SBICs make semiannual payments, accrual SBICs aren’t required to make any payments on either the principal or the interest of a loan until the loan matures in full. This aligns accrual SBICs more closely with longer-duration investment funds that don’t focus on annual performance.

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. A reinvestor SBIC must invest at least half of its available capital in other underlying funds.

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. Structuring a fund as non-leveraged SBIC rather than a standard investment fund can have advantages, including improved market credibility and potential tax credits for certain investors.

About the SBIC program

The SBIC program was created as part of the Small Business Investment Act of 1958 to foster investment in young companies. The SBIC program is administered by the SBA, which was founded in 1953.

Since its founding, SBICs have combined to invest some $130 billion across nearly 200,000 small businesses, according to the SBA. As of Sept. 30, 2024, there were 318 licensed SBIC funds within the U.S.

SBIC in the market

The U.S. has expanded the SBIC program recently, including the introduction of new licenses for accrual SBICs and reinvestor SBICs in 2023.

Recent growth

From 2019 through 2023, investors submitted an average of 35 applications each year for new SBIC licenses. In fiscal year 2024, that number rose to 127 applications, up 285% on a year-over-year basis.

Breakdown of SBIC fund types

Official government data categorizes each licensed SBIC fund into one of five fund styles, describing the type of investment that each of these funds primarily pursues.

• Hybrid funds: Just over 69% of SBIC funds fall into this category, making it the most common type.
• Private credit funds: Comprising 15.6% of SBIC funds, these funds pursue various strategies around direct lending.
• Venture funds: 7.8% focus on equity investments in young companies.
• Private equity and growth equity funds: These types account for 3.9% and 3.6% respectively, focusing on equity investments with different target company maturities.

How to become an SBIC

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 and investment track record.

Application process

The first step is to submit the Management Assessment Questionnaire (MAQ), which includes various supplementary materials and payment of an initial licensing fee.

Costs and timeline

The cost of applying for an SBIC license varies based on management experience, investment strategy, and categorization into one of four fund sequences. Here’s a breakdown of final licensing base fees by fund sequence:

In 2024, the average timeline to process an SBIC application extended to 12 months due to increased applicant interest.

SBIC reporting requirements

Because they invest capital from the federal government, SBIC funds are subject to stricter regulatory and reporting regimes than usual private funds.

Form 468

Funds licensed by the SBIC must submit both a Quarterly Form 468 and an Annual Form 468 to the SBA, providing insights into fund-level performance.

Form 1031

Each investment requires a corresponding Form 1031, which includes company information and investment details, submitted within 30 days after the end of the quarter in which the investment closed.

How Carta supports SBIC funds

Reporting support

Carta’s platform aids in the demanding SBIC reporting requirements and can signal credibility to the SBA during the application process.

Policy thought leadership

The Carta policy team engages with the private fund ecosystem and policymakers, providing insights and opportunities for funds to understand licensing and regulatory requirements.