The Small Business Investment Company (SBIC) program is emerging as a powerful financial tool for small business government contractors seeking a transformative approach to financing and growth. This third blog in the series “Focus on SBA’s SBIC Program” demystifies the intricate SBIC application process and reveals strategic benefits associated with obtaining an SBIC license. Small business government contractors should familiarize themselves with the application process to unlock new avenues of capital to foster their success. Please visit this link for Part 1 and this link for Part 2 in the series.
Part 1 of our series provided a high-level overview of the SBIC, and the myriad benefits it can provide to companies seeking low-cost, government-backed capital to invest in small businesses. Part 2 of our series introduced the complex nature of the application process and discussed considerations that potential SBIC applicants should consider during the pre-application process.
In Part 3, PilieroMazza explores the application process itself. At this stage in the process, the potential applicant familiarized themself with the regulatory challenges involved with earning SBIC status, including the organizational and capitalization requirements discussed in Part 2 of this series. The potential applicant determined that an SBIC structure provides the benefits and opportunities necessary to take their business to the next level. Below, we will explore the intricacies of the application process itself.
Once a potential applicant has determined that an SBIC is the right for their business, it is time to begin the SBIC license application process. However, before beginning work on an SBIC license application, the SBA strongly encourages potential applicants to engage with the SBIC pre-screening process. The pre-screening process is a significant benefit to both the applicant and the SBA. There are guidelines that the SBA follows in making its decision, but these guidelines provide the SBA with significant discretion when it comes to approving or denying an application. Due to this discretion, and the uncertainty that comes with it on the part of the applicant, the pre-screening process is an important and transparent initial step that allows an applicant to gain valuable feedback on their application prior to its submission.
The pre-screening application requires the submission of a three-to-five-page executive summary of the applicant’s SBIC fund proposal. This executive summary includes two parts. The first part is a narrative section detailing, among other things, the applicant’s investment strategy, investment criteria, target deal profile, and management team biographies. The second part outlines the track record of the applicant’s management team. This is where the applicant has the opportunity to highlight credentials of the various members. A successful track record of investments is especially important to the SBA. However, the track record section may only include investments that team members voted on as members of an investment or credit committee or investments that such team member led and was materially engaged in. In accordance with the evaluation criteria discussed in Part 2, the track record section holds considerable weight.
Following the submission of the executive summary, the SBIC applicant has the opportunity to speak with the SBA’s Investment Division’s Office of Program Development (OPD). During a 30-minute phone call, the OPD will provide feedback on the application, citing areas where the application could improve and providing general insight on the applicant’s chances of success. Implementing this feedback into the formal application is critical to an applicant’s success.
Once an applicant is prepared to move forward with their application, the first phase of the application process requires: (i) the payment of an initial licensing fee, which is $11,500 as of October 1, 2022, and (ii) the submission of the of the Management Assessment Questionnaire (MAQ), a foundational step in the application process. The MAQ includes Form 2181, which is a narrative section, and Form 2182, which is an Excel supplement. These forms cover much of the same ground as the pre-screening process executive summary but in much greater detail. This is also where the applicant will clarify their leverage request, specifying the number of SBA-guaranteed debentures they intend to access. Submission of the application requires $10,000 in base fees, plus an additional $5,000 for partnership licensees, or an additional $15,000 for Early Stage SBIC Applicants.
Once complete, the MAQ is submitted to a licensing office, which will analyze the MAQ, conduct due diligence, and prepare a written recommendation to the Investment Committee of the SBA’s Office of Investment and Innovation. If the Investment Committee determines that the applicant is qualified for a license, the applicant’s team is invited to SBA headquarters for an in-person interview. If the Investment Committee votes to proceed, the applicant is granted a “green light” and may formally apply for an SBIC license.
It should be noted that this “green light” only constitutes an invitation to proceed with the application process and does not mean that the applicant is qualified to receive an SBIC license. The next step is the submission of the formal license application within 18 months of the “green light” letter. This formal license application consists of an updated version of the MAQ, which includes additional forms. The Final Licensing Fee, as of October 1, 2022, is $40,200.
Upon receipt and review of these materials, the application will pass through various SBA committees for approval. At this stage, the applicant must have at least $2,500,000 on deposit. This amount includes any approved pre-licensing investments, as well as operating and organizational expenses. If the SBA’s Agency Licensing Committee approves the application at this stage and all other prerequisites are met—including the regulatory requirements previously discussed and any other requirements under the FAR—the SBA Administrator may approve the application and the license may be issued.
The path to success for small business government contractors starts with a clear understanding of the application process, as well as the benefits of securing an SBIC license. If you have questions about the SBIC program, please contact the authors of this blog, Cy Alba, or Robert Troiano, or another member of PilieroMazza’s Business & Transactions or Government Contracts practice groups.
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