Looking Ahead

The Bond amendment means entrepreneurs will have to ante up more of the company stock they give to SBICs in exchange for funds. Typically, of course, entrepreneurs have little luck when trying to get financing from venture capital companies. But when the venture capital firm invests, it is exclusively in the form of stock. That means the business owner is giving up more control than he or she would with a convertible debenture--a combination long-term loan and stock deal--from an SBIC.

The SBIC gets money from the SBA when the SBA sells a security debenture to the private market; the most recent example was a $160 million debenture the SBA sold with an interest rate of 7.35 percent. Purchasers were pension funds and other institutional buyers.

Assume the SBA parceled out that $160 million to 16 SBICs, each of which got $10 million. In the past, each SBIC would have paid the SBA a onetime 2 percent transaction fee. The Bond bill raised that to 3 percent. In addition, the SBICs would have had to pay that $10 million back at a 7.35 percent interest rate. The Bond bill added a 1 percent point "add-on," so the SBIC now has to pay 8.35 percent.

The new fees enabled Congress to reduce the SBIC appropriation from $40.5 million in fiscal 1996 to $21.7 million in fiscal 1997. As a result, the amount of SBA money available to SBICs will jump from $374 million to $650 million.

But while there may be more money available, it will cost entrepreneurs more dearly. Don Christensen, associate administrator at the SBA for investment, presumes SBICs will partially pass along those fees. "Where the SBIC gave an entrepreneur $100,000 and took maybe 10,000 shares of stock before, maybe they will take 11,000 shares now," he explains.

Still, the congressional rescue of the 7(a), 504 and SBIC programs seems like a pretty good deal. Money needed for the SBA budget is reduced while the amount of money available to small businesses expands.

This article was originally published in the January 1997 print edition of Entrepreneur with the headline: Looking Ahead.