Issues in funding the activities of small firms through SBICs

Carefully designed securities can minimize conflicts of interests between a firm's shareholders, creditors, and managers and can improve the availability of funds. Small business investment companies (SBIC) tend to use equity contracts to finance the activities of firms that initially generate relatively few tangible assets, such as R&D. While such activities are also likely to have very little cash flow in the short run, their future growth opportunities might be high. Bank-owned SBICs tend to pursue a strategy of extensive equity investments, specializing in funding younger firms and projects that generate few tangible assets. The propensity of bank-owned SBICs to pursue equity-type investments when the opportunity arises may offer a glimpse of the markets that might be served by banking organizations in the absence of existing regulations.