Small BusinessFinancial Health of Small Business Investment Companies Gao ID: RCED-93-51 May 5, 1993
Under a program created by the Small Business Investment Act of 1958, small business investment companies provide financing to small businesses through equity investments (stock) and debt (loans). The companies obtain their money primarily from two sources--privately invested capital and long-term-debentures guaranteed by the Small Business Administration (SBA). When a company has losses exceeding half of its private capital or is unable to repay SBA for leverage, the agency may liquidate the company. When this occurs, small businesses lose an important source of financing, and the private investors and the federal government can lose all or part of their investments. Between October 1986 and September 1991, SBA incurred losses of more than $90 million due to such liquidations. This report provides information on (1) reasons for small business investment companies' liquidations between January 1986 and March 1991, (2) a comparison of the financial performance of active and liquidating companies, and (3) the statistical correlation of several key characteristics of the companies and their investments with their liquidations and financial performance.
GAO found that: (1) most SBIC are liquidated for poor financial performance, while other SBIC are liquidated due to regulatory violations and voluntary surrender of licenses to avoid prepayment penalties; (2) high interest costs and liquidity problems have contributed to SBIC liquidations; (3) SBIC are more likely to fail if they are leveraged and equity-oriented; and (4) larger and older SBIC have performed better than smaller and newer SBIC.