BDCs: small business lifeline

Access to capital is one of the most significant challenges facing small businesses in America. Tougher lending restrictions from banks have created a gap that is having dire consequences for companies across the country. Some small businesses, like Unitek, have been fortunate to tap alternative funding sources that have allowed them to thrive and prosper. However, a new federal rule threatens that small business funding source with burdensome new regulations that would only worsen a growing problem.

Since the economic recession, traditional banks have consistently pulled away from the small business sector, leaving many companies struggling to fully recover from the downturn. Smaller companies often lack liquidity and borrowers often lack the necessary collateral to meet new, more stringent risk thresholds

{mosads}In response, small and medium-sized businesses have turned to business development companies, or BDCs, where access to capital is more achievable.

Small businesses across America have received more than $70 billion from BDCs since they were created by Congress in 1980. Unlike traditional bank loans, BDCs can offer flexible terms through more creative lending, such as revolver loans that allow smaller companies to draw on capital as they need, while only paying interest and fees on the portion of their credit line they have actually used.

The small business sector is essential to the U.S. economy, accounting for 99 percent of the U.S. businesses and nearly half of all private sector employment. And small companies don’t just create jobs, they drive innovation, producing 13 times more patents per employee than larger firms.

Despite this success, small business owners report receiving only 40 percent of requested funding from traditional banks, while 58 percent say they needed more flexible terms.  Without the necessary access to capital, Main Street cannot grow and support our rebuilding economy.

BDCs not only bridge the gap in funding for small companies, they provide guidance and management support to further ensure a positive outcome for both the business owner and investors.

However, the recently proposed rule by the Securities and Exchange Commission would restrict the amount of funding small businesses can receive by limiting a BDCs use of derivatives and changing the threshold for asset coverage.

If enacted, this rule would tie up BDC capital, restricting resources currently used for making loans and limiting the number of would-be borrowers. This could have negative outcomes for the country’s small businesses — consequences that would be felt across the U.S. economy. 

As an executive at Unitek, a telecommunications firm, I remember how challenging it was to access capital when we needed it. Working across the country to provide solutions for communications infrastructure, we were in the midst of making some hard decisions about the company’s future when we were introduced to our BDC partner.

Our BDC tailored a funding program for Unitek that made sense for our current situation and provided a path forward that allowed us to grow for the future. They continued to offering strategic guidance and business advice as we stabilized and evolved our business, and now we are thriving with over 2,000 employees in over 50 locations.

For the sake of the small business sector, regulations applied to BDCs need to be considered separately from other investment vehicles. They are not just investors; they are a management partner that supports all aspects of their portfolio companies’ growth. Rather than taking a blanket approach to rulemaking, the SEC should instead ensure that it is fostering a smart regulatory environment that allows small businesses to continue driving our economy.

Kathleen McCarthy is General Counsel of Unitek.