How the SBIC Program Gives Private Capital Low-Cost Leverage + Regulatory Flexibility

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The Opportunity

If you manage private capital and invest in U.S. small businesses, there is a government program that will lend you long-duration, low-cost leverage — at recent rates around 4.63% for a 10-year interest-only debenture — and give you a regulatory exception that solves one of the most common structuring problems in lower-middle-market investing.

That program is the Small Business Investment Company (SBIC) program, administered by the SBA.[1] It has been around for decades. It is not new. But it is newly relevant — because recent legislation, policy momentum around critical technologies, and the defense industrial base are creating a window that favors new applicants with the right strategies.

How It Works

An SBIC is a privately owned and managed fund, licensed by SBA, that invests in qualifying U.S. small businesses using its own capital plus SBA-guaranteed leverage.[2]

The basics:

• You raise private capital from LPs (your "regulatory capital").
• Once licensed, you draw SBA-guaranteed debentures — 10-year, low-cost, non-dilutive leverage.
• You invest in qualifying U.S. small businesses within SBA's eligibility framework.
• At least 25% of your financings go to smaller enterprises (net worth under $6M / net income under $2M, or applicable industry size standard).[3]

Three License Types Worth Knowing

Standard Debenture. Semiannual current-pay interest. Up to 2:1 leverage. Best for private credit, mezzanine, and other current-pay strategies.[4]

Accrual Debenture. Interest accrues over 10 years — no current-pay requirement. Designed for longer-duration equity and growth strategies.[5]

Non-Leveraged. No SBA leverage, but you still get the regulatory benefits — including the affiliation exception. Useful if your primary goal is structuring flexibility, not leverage economics.

Choosing the right license type is a strategy decision, not just an application checkbox.

The Affiliation Exception

This is where it gets interesting for equity-oriented strategies. Under SBA's affiliation rules, a portfolio company's size is measured together with its affiliates — which can include the fund's other holdings. This creates real problems for traditional PE investors in small businesses.[6]

The SBIC affiliation exception changes the math. A portfolio company is not deemed affiliated with an SBIC (or the SBIC's other investments) solely because of the SBIC's equity investment. For funds deploying equity, preferred equity, warrants, convertibles, or other equity-linked capital, this creates structuring flexibility that ordinary investors cannot replicate.

New Legislation: Investing in All of America Act

In May 2026, the Investing in All of America Act became law.[7] It allows certain qualifying investments — in rural areas, low-income areas, covered technology categories, and small manufacturers — to be excluded from leverage-cap calculations. The practical impact will depend on SBA implementation, but the policy signal is clear: the government wants more SBIC capital flowing to manufacturing, defense tech, and underserved markets.

The Tradeoff

SBIC status brings real ongoing obligations — eligibility review, reporting, valuation, examinations, and compliance with investment restrictions. These are manageable with the right infrastructure, but they are not trivial. The question is whether the leverage economics and structuring advantages justify the regulatory overhead for your specific strategy.

Who Should Be Looking at This?

Growth equity funds. Private credit managers. Banks and bank-affiliated platforms. Family offices. Infrastructure and critical minerals funds. Defense-sector funds. Fundless sponsors with a thesis that fits.

If you invest in U.S. small businesses and want low-cost leverage, regulatory flexibility, or both — the SBIC program deserves serious evaluation.

Maynard Nexsen’s Government Solutions team has deep experience with SBA compliance matters and is actively advising both existing SBIC funds and prospective applicants on structuring, licensing, and deployment strategies.

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Related prior insight:

• Supercharging Defense Startups: How the SBIC & SBICCT Programs Unlock Funding Without Forfeiting Set-Asides

_{This article is provided for general informational and educational purposes only and does not constitute legal advice. Nothing in this article is intended to create, nor does it create, an attorney-client relationship with Maynard Nexsen or any of its attorneys. The information is general in nature; your specific circumstances may vary and you should consult qualified legal counsel before taking any action. Past results do not guarantee a similar outcome.}

_{[1]See SBA, "Apply to be an SBIC," sba.gov/sbic; 15 U.S.C. § 681 et seq.}

_{[2]13 C.F.R. Part 107 (SBIC program regulations).}

_{[3]13 C.F.R. § 107.710; § 107.700 (smaller enterprise definition).}

_{[4]13 C.F.R. § 107.1150 (leverage limits); SBA, "Manage an SBIC" (Standard Debenture mechanics).}

_{[5]88 Fed. Reg. 46008 (July 14, 2023) (Accrual SBIC modernization).}

_{[6]13 C.F.R. § 121.103(b)(1) (SBIC affiliation exception).}

_{[7]Investing in All of America Act of 2025, Pub. L. No. 119-92 (May 19, 2026).}