Trump administration outlines plan to speed SBIC licensing

  • SBA: Any licensing slowdown is in the past
  • Agency revamping its internal processes
  • Wants to drum up demand for SBICs in rural areas

The U.S. Small Business Administration, facing criticism for a slowdown in licensing times in the Small Business Investment Company program, is working on a series of fixes to improve the efficiency of the process.

The SBIC program, which provides government-backed leverage for GPs that invest equity and debt in qualifying small businesses, has broad bipartisan support as a cost-effective way to support small businesses and spur economic growth.

But investment professionals have been frustrated by the recent administration of the program, complaining that long wait times for SBIC licenses have made the program less appealing to both GPs and their LP investors.

After going through an initial vetting process and securing LP commitments, a GP must secure a formal license before its SBIC fund can access the leverage that makes the program so attractive.

The SBA acknowledged industry concerns, and a spokesperson told Buyouts that Administrator Linda McMahon is committed to improving the program.

The SBA laid out some process-oriented fixes, like new software and internal reporting on pending licenses, as well as more aspirational goals, like boosting demand in rural areas and increasing the participation of women, veterans and minorities.

The Donald Trump administration’s SBA has learned from its first two years running the program. It has ideas for improving efficiency and reducing the cycle time for issuing licenses, starting with a technology overhaul, the spokesperson said.

In September 2018, SBA awarded a contract for software to help the agency track, manage, analyze and report licensing activity within the SBIC program. The new software is the first major technology improvement to the SBIC program since 1994, according to the agency.

SBA also is reviewing the resources it allocates to SBIC licensing.

“While the SBIC program has almost doubled from $7.9 billion in 2010 to approximately $15 billion by the end of 2016, the resource allocation for processing the licenses has not kept pace,” the SBA spokesperson said.

“While making sure that the licenses are processed efficiently, the SBA team is intently focused on ensuring that the risk is managed effectively, consistent with the risk standards for Federal Credit programs.”

The SBIC program should also benefit from SBA-wide efforts to make the agency more efficient, the spokesperson said. SBA is focused on “re-engineering business processes as well as ensuring a higher level of automation,” seeking to boost productivity while maintaining effective risk management, the spokesperson said.

The SBA also argued that any slowdown in licensing was in the past. The SBA issued 15 licenses in 2017, and was able to increase that number to 25 in 2018, while the SBIC program surpassed $30 billion in private, outstanding and committed SBA-guaranteed capital, according to the agency. The 2018 number was more in line with the average number of new licenses granted during the last three years of the Barack Obama administration, according to SBA statistics.

Beyond improving the efficiency of its licensing, SBA also wants to drum up more demand for new entrants into the SBIC program. The number of new applicants in the initial stage of review dropped to 17 in 2018 from 27 in 2017. The number of new licenses granted to first-time applicants has also dipped over the past few years, dropping steadily from 18 in 2014 to one in 2017, before increasing to 11 in 2018.

Demand has been steadier from firms already familiar with the SBIC program. The number of licenses awarded to returning applicants who had already raised previous SBIC funds has hovered between 12 and 14 a year over the past five years.

To increase demand from new entrants, SBA has reached out to educate prospective applicants as well as investors about the SBIC program. The program has participated in conferences and partnered with other federal agencies to promote itself in areas that don’t have adequate investment capital, especially rural areas and states without any SBICs.

One outreach initiative aims to educate banks about the Community Reinvestment Act and CRA-eligible investments, which are an important catalyst for bank investments into SBICs, according to the agency.

SBA has not committed to any concrete goals as to the number of new licenses or the average timeline for granting licenses. It will establish baselines once it has a chance to evaluate market demand and the effectiveness of its new software and efficiency initiatives, the spokesperson said.

Action Item: Check out the SBA’s latest statistics on the SBIC program here