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Why CEOs Should Know About BDCs

When a multi-location provider of end-of-life care with $38 million in revenues needed $13 million in financing for a dividend, it did not find the funds at a bank. Rather, it used a Business Development Company (BDC).

Ditto for a nationwide distributor of office equipment with $11 million in annual revenues looking for $5.4 million to recapitalize the company. And when an industrial-controls corporation needed $9.5 million to roll several sales-representative firms up into a larger company, it found the financing at a BDC.

Banks, under tougher regulations than ever, either would not or could not meet the financing needs for these representative, middle-market businesses.

“The overwhelming majority of companies served by BDCs are privately held and family owned. They have significant capital needs; but, because they work in a fragmented marketplace, they are underserved by banks.”

Congress enacted legislation creating BDCs in 1980 as an amendment to the Investment Company Act of 1940. The idea was to create a regulated entity to focus on the capital needs of smaller, middle-market companies.

Few investors or CEOs have known what BDCs are and why they are advantageous to growing businesses, but that situation is changing. Since January 2007, BDCs have grown from 16 to 41 companies. They serve an estimated 65,000 businesses in the U.S. with revenues in the range of $20 million to $200 million; the overwhelming majority of these businesses are privately held and family owned. Such companies have significant capital needs; but, because they work in a fragmented marketplace, they are underserved by banks.

Here, then, are six reasons why BDCs are thriving and will continue to grow as a source of capital for smaller, middle-market companies and why CEOs should understand how valuable they are as a source of financing.

About Christian L. Oberbeck

Christian L. Oberbeck