One of the first steps toward a professionally-managed private equity and venture capital industry was the passage of the Small Business Investment Act of 1958.
The 1958 Act officially allowed the SBA to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.
Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. Additionally, it was thought that fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union.
Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U.S. economy was and still is the main goal of the SBIC program today. [7] The passage of the Small Business Investment Act of 1958 by the federal government was an important incentive for would-be venture capital organizations. The act provided venture capital firms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access to federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds.
The success of the Small Business Administrations efforts are viewed primarily in terms of the pool of professional private equity investors that the program developed.
In 2005, in response to extensive losses incurred in connection with tech boom investments, the SBA decided to wind down its "Participating Securities" SBIC program, which had provided equity-like SBA backing for equity-oriented SBIC funds. That program had been launched in the early 1990s. The last funding to Participating Securities SBICs occurred in late 2008.
The SBA's "Debenture" SBIC program, the original SBIC vehicle founded in 1958, is still very much alive and healthy and continues to license and contribute capital to SBIC funds. As of October 2009, there were approximately 125 active Debenture SBICs operating in the US.
SBA loan industry
The SBA loan industry can be divided into distinct categories:
* The largest United States Banks, such as Bank of America and Wells Fargo, generate the bulk of their SBA loan volume by the loans, especially the express loan and line of credit, being offered to those who would be declined for a normal bank loan due to factors such as length of time in business or slightly stricter affordability factors. These banks have sophisticated computer systems that generally makes this process seamless, and are quite different from other financial institutions who utilize SBA lending for separate and distinct purposes
* SBA loans are used heavily by banks of all sizes to finance the purchase or construction of business owner occupied real estate (ie. real estate purchased by a business).
Many banks only offer SBA loans for this purpose. In particular, they are using to finance properties that the bank would consider too risky to finance on their own, due to them being of a special or environmentally risky nature that can make their resale value limited; these properties include Motels, Gas Stations, and Car Washes.
* SBA loans are also used to allow individuals to buy existing businesses.
Since, unlike in real estate transactions, commercial lenders are allowed to pay a referral fee to business brokers who help people buy and sell businesses, this segment of the industry is dominated by smaller banks and standalone finance companies who engage in this practice.