How Small Business Investment Company works - Business - Entrepreneurship

How Small Business Investment Company works   by Yury Iofe

in Business / Entrepreneurship    (submitted 2010-07-24)

SBA Investment program

The Small Business Investment Company (SBIC) Program was created by Congress in 1958 to provide an alternative source of financing for entrepreneurs.

SBIC's are licensed by SBA. SBIC's are professional, privately owned and managed venture funds that participate in a partnership between government and the private sector economy. This program provides comparatively inexpensive equity capital, long-term loans, and debt-security investments. SBIC Program is a "fund of funds."

SBIC's may not invest in the following: finance and investment companies or finance-type leasing companies; unimproved real estate; companies with less than 51 percent of their assets and employees in the United States; passive or casual businesses or companies that will use the proceeds to acquire farmland. SBIC's may not provide funds for companies' whose primary business activity is deemed contrary to the public interest.

Application process

It is very important to present yourself in the most professional way possible, to have business plan and show experience in the industry. Lender takes into consideration the following: business and personal credit history, company's financial statements and cash flow projections.

Business owner's investment (Equity)

Loan applicants must have a reasonable amount of capital invested in their business.

You need to show the lender that business can operate on a sound basis with prospective capital structure. Lenders want you to contribute your own assets and to assume personal financial risk to establish the business before asking them to commit any funding. Lenders know that you are more likely to do everything in your power to make the business successful if you infused significant personal investment in the business.

Examination of the debt-to-worth ratio will be performed by a lender in order to evaluate solidity of the project. Personal investment can be made by assets that applicable to the business or by cash. Assets value is determined by financial statement for existing business or by appraisals and invoices for start-ups.

Low debt to equity ration shows the firm's financial health and indicates that owner is committed to the business and decreases possibility of default and particularly very important for a new business.

Your business plan should show financial projections for at list five years and prove to the lender that company's expected earnings are sufficient to cover loans payments. The higher the projected profits the greater is a probability that the loan will be approved. Applications with high debt, low equity, and unsupported projections are candidates for loan denial.

Yury Iofe, MBA

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