Alternative sources of capital for smaller challenged companies

By Heidi Luck, SVP, Asset-based Lending
There is ample alternative liquidity in the market for smaller companies; companies defined by the Small Business Administration (SBA) as “small” are eligible for Small Business Investment Company (SBIC).

Generally, the SBIC program defines a company as “small” when its net worth is $18.0 million or less and its average after tax net income for the prior two years does not exceed $6.0 million.1

If your company has a buy-out where EBITDA is greater than $8 million, the challenge to get capital is minimal. There are plenty of cash-flow lenders to step into this type of situation. When EBITDA falls below $8 million a company may struggle to find a cash-flow lender that is willing to finance them. That is when one of the many SBICs, that have popped up over the past few years can come in handy. “Lenders are listening to company stories and picking the spots they want to get involved in, so there is more liquidity than ever in the market.” Michael D. Sharkey, President, MB Business Capital

Since 1959, SBICs have supplied equity capital, long-term loans and management assistance to qualifying small businesses. The SBIC program is one of many
financial assistance programs available through the SBA. The structure of the program is unique in that SBICs are privately owned and managed investment funds, licensed and regulated by SBA, that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses.1

There truly has been an explosion in the number of SBICs in recent years. At the end of 2011 the SBA had over $8.2 billion invested in 299 funds. Together with private capital of approximately $8.8 billion, the program totals over $17 billion in capital resources.2 These funds can raise up to $75 million in capital and leverage it with the federal government 2X. That results in a $225 million fund capable of putting small tranches of junior debt into deals which bridges the gap between the purchase price and what a good asset based lender can do. 

Companies with over-leveraged balance sheets and marginal operating results can be challenged in finding senior financing.

“Independent finance companies have been forced deeper and deeper into this market,” says Michael D. Sharkey, president of MB Business Capital. “Lenders are listening closely to company stories and picking spots they want to get involved in, so there is more liquidity than ever in the market.”

1 http://www.sba.gov/content/sbic
2 https://www.sba.gov/sbic/general-information/faqs
Quotes taken from “What’s the Deal with Deals”, Chicago, Illinois, 2012