By Melissa S. Monroe

Small businesses could see a boost in much-needed capital if a legislative bill successfully makes it through the 108th legislative session that would relieve the tax burden on investment companies that fund high growth small firms.

SBICs, or Small Business Investment Companies, (they provide small firms with long-term loans and equity investments) are missing an estimated 60% of the private capital potential available to them because non-exempt groups like pension and university endowment funds are avoiding them.

Tax-exempt entities cannot invest in SBICs without incurring a tax liability known as "unrelated business taxable income" or UBTI.

But Senate Bill 1637, also known as the Jumpstart Our Business Strength Act was recently amended by Sen. John Kerry, (D- Mass.), to make it easier for debenture SBICs to receive funding from tax-exempt sources.

"Currently, only a small percentage invested in debenture SBICs comes from tax-exempt investors,” says Kerry via e-mail. “The current tax code unnecessarily hinders such investment because it creates taxable income for an otherwise tax-exempt investor. My amendment changes the law to allow tax-exempt investors to provide venture capital to debenture SBICs without this tax burden."

SBIC is a 45-year-old program of the U.S. Small Business Administration with the purpose of leveraging government money with private investments to provide capital for small businesses.

This bill would only affect debenture SBICs and not participating SBICs. Debenture SBICs typically provide loans and allow firms to keep greater ownership of the company. Participating SBICs aim to control equity in a small business.

The loss of venture capital to SBICs amounts to about $600 million that small businesses are not receiving, says Lee W. Mercer, president of the National Association of Small Business Investment Companies.

“[The tax code] is a significant impediment to raising private capital for debenture SIBCs,” Mercer says. “The [SBIC] program has not grown as much as it could in the ability to help small businesses.”

Despite the slow growth, the program has put up some impressive figures according to SBA. Since 2002, about $2.7 billion has been provided from SBIC financings. Companies that received these funds employed 1.1 million in 2002.

More than 27% of SBIC financing dollars went to low and moderate income areas in 2002 and 25% of that went to manufacturing companies.

Bill Kirk, general counsel for the National Association of Investment Companies, says clearing the tax burden is a step in the right direction, but it isn’t the sole hurdle preventing venture capital firms from getting more funding. Kirk says venture capital firms need to also show their investors they have an effective strategy.

NAIC is the only trade group for venture capital firms dedicating investment dollars in an ethnically diverse marketplace. NAIC member firms represent more than $5 billion in capital under management.

Radio One, Inc., which went public in 1999 and operates 65 radio stations targeting African-American and urban listeners, is a perfect example of what can happen when SBICs fund a business.

According to SBA, Radio One financed many of its early acquisitions with SBIC loans totaling about $9.5 million in funds. (Radio One is No. 8 on the BE Industrial/Service list with $335.7 million in sales).

Kerry said the SBIC program has accounted for about half of all venture capital deals done in the United States over the past few years.

"The SBIC program fills the gap between the availability of venture capital and the needs of small businesses in startup and growth situations,” Kerry said.

Senate Bill 1637 is currently in the Senate Finance Committee and still has to go through the House of Representatives before becoming a law.