Tuesday, July 14, 2009

It’s Time to Start Your Small Business

I know, I know you’re thinking that you’d have to be crazy to start a business in this economy. Well, maybe not. Changes in the American Recovery and Reinvestment Act intend to make it easier for small businesses to win venture capital.

The changes are designed to help Small Business Investment Companies (SBICs). The idea is if these companies can perform better, then small businesses will have greater accesses to venture capital. Small Business Investment Companies are privately owned and managed venture-capital firms licensed and regulated by Small Business Administration. They use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make investments in small businesses. The Small Business Investment Companies program was created in 1958 to stimulate the growth of America’s small businesses by supplementing the long-term debt and private-equity capital available to them.

The following shows the changes, which in a nutshell make it possible for SBICs to lend out more money:

  • Investing 25 percent of investment dollars into “smaller” businesses.
  • Changing the amount of funding an SBIC may invest in a single small business to 10 percent of an SBIC’s total capital rather than the previous limit of 20 percent of an SBIC’s private capital only — which could mean a 50 percent 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 up to $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.

These limits are even higher for SBICs that are licensed after October 1, 2009, that certify that at least 50 percent of their investments will be made in small businesses located in low-income areas, up to $175 million for single licensees and up to $250 million for jointly controlled multiple licensees.

Venture Capital is probably not available for your dream coffee shop. Typically it’s given to young companies that show combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, well thought through business model and impressive management team. VCs typically reject 98% of opportunities presented to them, reflecting the rarity of this combination. However, now that more funds can be released the competition to receive VC may be less great.

1 comment:

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