Small Business Investment Companies: Financial Characteristics and Investments

By Brewer, Elijah, Iii.; Genay, Hesna | Journal of Small Business Management, July 1995 | Go to article overview

Small Business Investment Companies: Financial Characteristics and Investments


Brewer, Elijah, Iii., Genay, Hesna, Journal of Small Business Management


In the United States, small businesses rely on commercial banks and the Small Business Administration (SBA) guaranteed loan program to satisfy their short-term and intermediate-term financing requirements. Unlike larger firms, small businesses have difficulties accessing long-term debt and equity markets. In general, their lack of tangible assets that can be pledged as collateral, higher business and financial risks, and greater operational flexibility have combined with other factors to limit the availability of long-term debt and equity sources of funds.

Small Business Investment Companies (SBICs) offer some relief from the scarcity of financing for small firms. The SBIC program was established in 1958 to provide long-term funds to small businesses, not only through loans and other debt instruments, but also through equity investments (see U.S. SBA 1992). Individuals, banks, and other financial institutions, as well as nonfinancial firms, can form SBICs. During the first few years of the program, the number of SBICs increased rapidly; by the end of 1966, 794 SBICs had been licensed, and over $1 billion had been dispersed to small firms. The subsequent oil crisis led to extensive bankruptcies both among the SBIC-backed small firms and SBICs themselves (Gompers 1994). After languishing for several years, the program has shown renewed vigor since the mid1980s.

The driving force behind the recent surge in SBICs' activities has been the SBICs owned by banking organizations. While banks cannot make direct equity investments, they can do so indirectly by establishing SBIC units. SBICs are also unique in that they have access to government subsidies and thus can leverage their private capital with government funds, unlike other venture capital firms. Such leverage is supplied through guarantees or direct purchases of SBICs' debt obligations by the SBA.

This article examines whether SBICs are able to resolve the conflict between the types of investors and financing that are most appropriate for small businesses. The economics of financing small businesses is explored and the characteristics and investments of SBICs are described. Two hypotheses are examined. The first hypothesis is concerned with whether the type of financing provided by an SBIC varies according to the riskiness of the project and the identity of the SBIC. The second hypothesis examines whether SBICs that are associated with banking organizations behave differently than other SBICs. In addition, an SBIC's performance is related to its financial characteristics to further examine whether SBICs that are associated with banking organizations have chosen to take advantage of the SBIC program in such a way as to produce return possibilities different from other SBICs.

PREVIOUS RESEARCH

With their own capital and funds borrowed at favorable rates from the U.S. Small Business Administration, SBICs provide venture capital to both new and established small firms. Apple Computer, Compaq Computer, Costco Wholesale, Symbol Technologies, Cray Research, Federal Express, Intel, and Staples are examples of companies that were partly financed by SBICs in their adolescence (Zweig 1992). Osborn (1977), using SBIC data filed with the SBA from the beginning of the SBIC program in 1958 through March 1970, examined the nature of the small firms which have been financed by SBICs and the character of the financing that has been provided. He found that over the sample period 39 percent of SBIC funds went to manufacturing industries, while 61 percent went to non-manufacturing industries. Of the funds supplied to manufacturing, 68 percent were used for operating capital, compared with only eight percent for fixed assets. Acquisitions utilized 14 percent of this financing, and seven percent went into refinancing. In comparison to manufacturing, a smaller proportion of SBIC financing to non-manufacturing was absorbed by operating capital and acquisitions; more was supplied for fixed assets and for refinancing. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Small Business Investment Companies: Financial Characteristics and Investments
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.