Leveraging the SBIC program to increase access to innovation capital

The U.S. Small Business Administration adopted new rules in 2023 that made it easier for venture capital funds to leverage federal resources under the Small Business Investment Company (SBIC) program, thereby increasing the capital they have available for early-stage investments. (See SSTI’s previous reporting on these changes here.) As noted in the article, the most significant change in this direction is the creation of an accrual funding mechanism. As venture funding moves to larger and later-stage deals and TBED initiatives face the prospect of funding challenges, awareness of innovation capital resources such as the SBIC program  is an increasingly important TBED strategy. 

The SBIC program was established in 1958 and supports the development and growth of thousands of small businesses with billions of dollars of funding annually. At a basic level, the SBIC program increases access to capital by allowing licensed finance companies (SBICs) to borrow funds and provide those resources to businesses. Under the standard model, businesses make regular payments to the SBIC, which then makes regular payments on the SBA-leveraged funds. 

Historically, venture capital funds have been eligible to participate in the SBIC program. However, the basic structure requiring regular repayments of leveraged funds, has not been a good fit for venture capital funds that do not have ongoing cash flow for debt service. 

The SBIC accrual model implemented in 2023 adjusts the program parameters to defer payments on the amount borrowed, thereby aligning better with venture capital models that rely on company exits to repay investors. The accrual model allows investors to pay off the accrued balance from returns when funds sell equity in portfolio companies. 

With all SBIC models, the borrowed funds must be repaid within ten years, though early repayment is allowed.

Accrual SBIC fund managers can leverage 125% of their private commitment, up to a maximum of $175 million. This amount includes the expected 10 years of accrued interest, which will reduce the amount of capital available to invest in startups and other portfolio businesses.

There are several parameters of the Accrual SBIC that fund managers should consider. First, as debt, the SBA interest is repaid before private investors reap a share of any return. After accrued interest is retired, any available capital is split between SBA principal and private investment in a pro-rata share. The net effect of this is that SBA priority pushes private return later in the investment cycle. 

The tradeoff for SBA taking priority repayments is that the amount due is only the amount borrowed and the accrued interest. There is no profit sharing with the SBA. This means that the share of investment profits generated from SBIC leverage is now available for fund managers and their limited partners. How those funds are distributed will depend on the agreements between the fund partners; however, for funds that perform well, there is the potential to significantly boost returns. The associated risk is that if the fund underperforms, SBA will see a return of capital, while private investors will see less. 

There are some features to the SBIC process that may directly and indirectly limit the program’s reach. One item to consider is that there is a rigorous and often expensive application and review process to become a licensed SBIC. Prospective applicants are expected to demonstrate relevant management experience and a successful investment track record prior to approval by the SBA. This filtering process does have a benefit, however, of allowing fund managers to identify potential limited partners that they have passed review with SBA. 

The program also has various fees and direct upfront costs. Additionally, there are annual and draw fees that need to be incorporated into the fund’s financial model. Understanding and covering both upfront expenses and ongoing costs will be crucial decisions for prospective fund managers. 

What does all of this mean from a TBED perspective? As those who work with startup companies are aware, access to capital can be challenging, particularly in regions without a strong history of successful venture capital investments. Leveraging the Accrual SBIC model may be an effective strategy for increasing the amount of capital available within an ecosystem. For TBED organizations, there may be an additional benefit of engaging risk-averse partners that have been sitting on the sidelines by highlighting the potential to increase returns.

For more information on the SBIC accrual model, please join us for a conversation with SBA staff on August 13, 2025, at 02:00 p.m. Eastern Time. Register here.

This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.