Small Business:

Evaluation of Investment Companies' Financing Activities

RCED-91-142BR: Published: Jul 23, 1991. Publicly Released: Jul 23, 1991.

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Pursuant to a congressional request, GAO reviewed the financing activities of investment companies participating in the Small Business Administration's (SBA) Small Business Investment Company (SBIC) Program, focusing on the: (1) number and dollar amount of SBIC financing made between 1983 and 1989; (2) size of businesses receiving such financing and the purpose of such financing; (3) SBA definition of small business and the ability of businesses with large gross assets to qualify as small business concerns; and (4) banks' role in providing financing through the SBIC and the specialized SBIC (SSBIC) programs.

GAO found that: (1) SBIC and SSBIC made 26,747 financings to small businesses, from 1983 to 1989, totalling $4.3 billion and the total funds invested annually in small businesses generally increased each year from $488 million in 1983 to $653 million in 1989; (2) between 1983 and 1989, SBA data showed that over half of all financings for which size data were available were made to businesses that had less than $1 million in total assets, less than $1 million in gross revenue, and fewer than 20 employees; (3) 66 percent of all financings were for operating capital and financings in businesses with assets of $10 million or more were twice as likely to be used for acquiring an existing business; (4) the SBA current definition of a small business concern does not restrict financing on the basis of asset size; (5) under SBA regulations a small business must have a net worth of $6 million or less and an annual average net income of $2 million or less after federal income taxes for the preceeding 2 fiscal years or meet size standards under other SBA programs; (6) since SBA was concerned that businesses were receiving SBIC financing for leveraged buy-outs of companies with large assets, it proposed regulations that would limit to $20 million the gross assets of a business whose change of ownership could be financed by an SBIC; (7) SBIC and SSBIC financings in which banks had at least a 50-percent ownership totalled $1.8 billion or 41 percent of funds, between 1983 and 1989; and (8) bank-dominated investment companies made a larger share of their financings for the purpose of acquiring an existing business than did other investment companies.

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