Edwards Wildman Client Advisory - The SBA Issues Instructions for Pre-Screening Prospective Applicants to the SBIC Program


    The U.S. Small Business Administration (the “SBA”) recently issued instructions for prospective applicants to the SBIC Program regarding the process of being “pre-screened” by the SBA to evaluate their fit with the program and receive direct feedback from the SBA. For any fund managers that would like to consider applying for an SBIC license, the pre-screening process, although non-binding and offering no guarantees of receipt or denial of an SBIC license, offers a valuable time-saving tool and cost-effective method for determining whether to proceed with a formal application.

    Pre-Screening Process

    The SBA’s pre-screening process requires a prospective applicant to take the following steps in order to participate:

        1. Understand the SBIC Program

    Pre-screening calls are only productive if the prospective applicant has an understanding of how the SBIC program works. Edwards Wildman’s SBIC team is available to discuss the program and the requirements for licensing. A general overview of the program is available at Edward Wildman’s SBIC website at www.sbiclaw.com.

    SBA regulations require SBICs to invest at least 75% of their total capital in U.S. small businesses (which have no more than 49% of employees overseas, less than $18M of tangible net worth and less than $6M of after-tax net income averaged over the prior two years) and at least 25% of their total capital in U.S. smaller enterprises (which have no more than 49% of employees overseas, less than $6M of tangible net worth and less than $2M of after-tax net income averaged over the prior two years. SBICs cannot invest in real estate, project finance, relenders, or U.S. small businesses with more than 49% of employees overseas and cannot invest more than 10% of investable capital in any one business.

        2. Submit an Executive Summary

    Prospective applicants must submit a 3-5 page Executive Summary describing the proposed fund to the SBA to SBIC@sba.gov with the subject line “Pre-Screening Request: [FUND NAME]”. The Executive Summary has two parts – a narrative section and a track record section.

    The narrative should include a description of the proposed investment strategy, an overview of the investment criteria and target deal profile (size, stage, industry, etc.), biographies of the management team and a summary of the management team’s experience working together.

    The track record details must be provided using the SBA’s form spreadsheet (downloadable here: http://www.sba.gov/sites/default/files/Executive%20Summary%20TR_2.xls). This spreadsheet requires the prospective applicant to describe investments made in prior funds, including details on the types of investments made, the amounts invested and realized and the IRR from each investment. The prospective applicant should include any investments that its management team members (a) voted on as members of an investment or credit committee, or (b) led through due diligence structuring, investment committee presentation and a meaningful period of post-close monitoring. 

        3. Schedule a Call

    Once the prospective applicant has submitted its Executive Summary, the SBA Investment Division’s Office of Program Development will contact the prospective applicant to schedule a call. An SBA Investment Officer will usually schedule the call within two weeks. 

        4. Pre-Screening Call

    Each pre-screening call with an SBA Investment Officer will be scheduled for 30 minutes. The Investment Officer will provide feedback on the Executive Summary, which may include highlighting strengths and weaknesses of the proposal in light of the objectives of the SBIC Program and SBIC licensing criteria. The pre-screening call will also afford the management team the opportunity to have any questions answered regarding the program, their investment strategy and their likelihood of success.

    Key Considerations for Prospective Applicants

    When deciding whether to submit an SBIC application, there are a number of factors to consider.

    The SBA’s instructions highlight investment style and management team characteristics that the SBA has identified as key elements of successful applicants. Arguably the most important factor in the SBA’s evaluation of an SBIC application is the principal’s investment track record. The SBA looks for track records with (a) strong returns on an absolute and relative basis across multiple investment cycles, (b) a meaningful number of full, positive realizations in the prior ten years, (c) types of investments that are analogous to the types proposed for the applicant, and (d) a demonstrated ability to generate the level of liquidity that would be needed to service SBA-guaranteed debt.

    The SBA also closely evaluates the qualifications of the management team. Successful teams are those where the members have a history of working together, where the members have complimentary skill sets relevant to the proposed investment strategy and where at least two members have track records meeting the foregoing standards.

    The SBA’s instructions also describe a number of the common deficiencies that cause license applications to be rejected, including:

    • Only one member of the management team has a qualifying track record.
    • A member of the management team improperly claims credit for deals he/she did not vote on as a member of the investment committee or lead.
    • The management team’s investment experience is not analogous to the proposed strategy for the SBIC.
    • Track records show prior fund performance that is poor in terms of return metrics, volatility or loss rates.
    • Track records do not demonstrate the ability to generate current income and manage the liquidity required to service SBA-guaranteed debt.

    During the SBIC pre-screening and licensing processes, it is helpful to provide as much relevant information to the SBA as possible. Disclosing potential issues to the SBA early in the process will give those issues time to be vetted, and, if the issues would lead to a rejection of a license application, early disclosure could save significant time and effort.

    If you have questions regarding the Pre-Screening Process or the SBIC program in general, please contact any of the attorneys listed on this page.

    Explore Additional Topics


    Please understand that your communications with Locke Lord LLP through this website do not constitute or create an attorney-client relationship with Locke Lord LLP. Any information you send to Locke Lord LLP through this website is on a non-confidential and non-privileged basis. Therefore, do not send or include any information in your email that you consider to be confidential or privileged.