Small Businesses Get Venture Capital Bailout

A trial balloon floated by the Obama administration late last week sparked speculation that small businesses may be next to benefit from a government bailout of sorts. The debate eclipsed an initiative coming out of the federal government's Small Business Administration.

As of July 10, small businesses that might otherwise have difficulty securing private equity or venture capital may find funding easier to obtain as a result of changes made as part of the American Recovery and Reinvestment Act to the SBA's Small Business Investment Company program.

SBICs are privately owned and managed venture capital firms, licensed and regulated by the SBA, that make equity and mezzanine capital investments in small businesses. There are 338 SBICs with $17.4 billion in capital under management. Since the SBIC program's formation in 1958, it has invested $56 billion in more than 106,000 small businesses.

Well-known companies have benefitted from SBIC capital as they ramped up, including Staples(SPLS Quote), FedEx(FDX Quote), Whole Foods Market(WFMI Quote), Intel(INTC Quote), Apple Computer(AAPL Quote) and JetBlue Airways(JBLU Quote).

But the new Apples and Intels have been relegated to toiling in obscurity or unprofitability, given that private equity firms such as Blackstone Group(BX Quote) and Apollo Management(AINV Quote), and investment-banking units of Bank of America(BAC Quote) and Citigroup(C Quote) have reined in spending.

The change makes SBICs eligible for greater SBA-guaranteed funding and requires them to invest 25% of their investment dollars into "smaller" businesses and, by adjusting caps, effectively offers a 50% increase in funding available to a single business by an SBIC. Maximum SBA funding levels to SBICs will increase up to three times the private capital raised by the SBIC, up to a maximum of $150 million for single SBICs, or as much as $225 million for multiple SBICs that are under common control. The cap for all licensees was set at $137.1 million before the Recovery Act.