Should Banks and Savings Institutions be Able to Invest More Money in Small Businesses? (H.R. 116)

What is H.R. 116?

(Updated June 6, 2019)

This bill would increase the amount that certain banks and savings institutions may invest in Small Business Investment Companies to up to 15 percent of their capital and surplus, subject to the appropriate federal banking agency’s approval. Currently, SBICs can’t take capital investments from banks that have over five percent of their capital and surplus investment in SBICs.

Argument in favor

Small Business Investment Companies (SBICs) provide a good return to investors while giving small businesses access to the capital they need to grow. This is a win-win and should be given greater support by allowing banks and savings institutions to invest more of their capital and surplus into these instruments.

Argument opposed

All investments, no matter what they are, carry a degree of risk. Allowing banks and savings institutions to put too much of their capital and surplus into any one type of investment increases risk in the market, and could expose banking consumers to greater risk, as well.

Impact

Small businesses; investors; banks; savings institutions; federal banking agencies; and SBICs.

Cost of H.R. 116

Based on information from the SBA, CBO estimates that implementing the bill would cost nothing, as it’d have no significant effect on the SBIC program’s administrative costs due to the limited number of banks that would probably be affected.

Additional Info

In-Depth: Rep. Judy Chu (D-CA) reintroduced this bill to support small businesses by giving them more access to capital:

“Small businesses are the backbone of our economy, accounting for two out of every three new jobs. And so, as part of our commitment to creating opportunities and growing our economy, it’s our responsibility to help more small businesses succeed. But I know, from talking to entrepreneurs in my district and around the country, that one of the greatest challenges to success is access to capital. That is what this bill will address, by letting banks or federal savings associations invest up to 15% of their holdings into SBICs. That will mean more entrepreneurs will be able to access the capital they need to grow their business and hire more workers.”

The Small Business Investor Alliance (SBIA), the leading association of lower middle market private equity funds and investors, supported this bill’s passage in the 115th Congress. SBIA President Brett Palmer said:

“Capital access is a challenge felt by small businesses nationwide. The SBIC program supports small businesses and entrepreneurs so they can do what they do best — create jobs and grow the American economy. Thanks to the bipartisan work of Chairman Hensarling and Ranking Member Waters, the inclusion of the Investing in Main Street Act is a key first step toward increasing the amount of growth capital available for investment in domestic small businesses.”

Palmer argued that SBICs benefit all involved:

“We hear this all the time, one of the greatest challenges to small business is capital access. Creating businesses and jobs is a matter for private capital markets, and the SBIC program is a great catalyst for small business investment. The program facilitates private investment while protecting taxpayers – and it’s why this program enjoys overwhelming support in Congress. This program makes it possible for entrepreneurs from all communities to access capital that otherwise would be inaccessible.”

In the current Congress, this bill has one cosponsor, a Republican. In the 115th Congress, this bill passed the House by voice vote, but wasn’t voted on in the Senate. It had the support of two bipartisan cosponsors, one Democrat and one Republican. It also had the support of the SBIA; Commerce Street Capital, LLC; and the Small Business & Entrepreneur Council (SBE Council).

Of Note: SBICs are highly regulated private investment funds that invest exclusively in domestic small businesses. They play a significant role in providing capital to small businesses — in fiscal year 2013 alone, they invested $3.5 billion in financing dollars to small businesses. From the program’s inception through December 2015, SBICs deployed $80.5 billion into approximately 172,800 financings.

However, they do carry a degree of risk, as they often provide financing that’s more aggressive thank banks could provide.

Media:

• Sponsoring Rep. Judy Chu (D-CA) Press Release (115th Congress)

• Small Business Alliance (SBIA) Press Release (In Favor)

• Commerce Street Capital, LLC Press Release (In Favor)

• Small Business & Entrepreneur Council (SBE Council) Letter (In Favor)

• Commerce Street Capital SBIC Overview (Context)