In 2011, President Barack Obama announced a new federal $1 billion fund for impact investing. According to Next City, “The specific goal of the $1 billion is to support small business investment strategies that maximize financial return while also yielding measurable social, environmental or economic impact.”
Nate Yohannes, whom the president officially appointed to serve as senior adviser to the chief investment and innovation officer at the Small Business Administration (SBA), was later given the task of finalizing the programs design – and making it permanent. Initially, the SBIC Impact Investing Program was created as a temporary policy under President Obama. However, according to Yohannes, the goal now is to move the program to a permanent status “before the end of this year”.
This program is housed under the SBA’s Small Business Investment Company (SBIC) licensing program. As such, the SBIC-licensed funds promise to invest in small businesses located in federal priority sectors and underserved communities. At the same time, these funds contribute to the growth and development of the impact investment industry.
For many private equity and venture capital funds, the standard SBIC license is an unbeatable deal. With this program, every dollar of capital raised is matched by the SBA up to 2-1 (with a maximum of $150 million). This capital is then dispersed by fund management firms for the purpose of investing in small businesses. Down the road, the fund management firm pays the SBA back with interest.
So far, the SBIC program has already begun addressing some well-known shortcomings. While there have been more than 300 SBIC-licensed funds to this point, they are only a small fraction of the entire venture capital industry. More than three-quarters of venture capital ends up in California, New York and Massachusetts – just three states. In addition, 87 percent of venture-backed startup founders are white, and 92 percent are men.
With the SBIC program, this is all starting to change. From 2011 to 2015, $21 billion in SBIC-licensed funds has been invested in 6,400 companies. 20 percent of which are located in low-to moderate-income areas. According to Yohannes, more funds are invested in women and minority-led companies as well.
Yohannes went on to say that “We’re gonna continue to do that, we’re gonna continue to invest money in the Mississippi Delta, we’re gonna continue to invest money in Detroit, we’re gonna continue to invest money in American small businesses where gaps are the widest.”
As the push for making the SBIC Impact Investing Program permanent begins, the conversation continues to be focused on the lack of funding small businesses experience. Where the “big banks” continue to fail, alternative lenders are picking up the slack. In many cases, these alternative lending options actually offer even better services, terms and support. For example, many small businesses and startups have turned to alternative lenders – like First American Merchant – for merchant cash advances, ACH loans and credit card processing options.
If you’ve struggled to secure the business funding you need, consider what our team here at FAM can offer you. Our application process is simple, fast and hassle-free.