Definition
A Business Development Company (BDC) is a type of publicly traded, closed-end investment company in the United States that invests in small and mid-sized businesses. BDCs are regulated by the Investment Company Act of 1940 and aim to help small- or mid-sized firms grow in the initial stages of their development. They often offer financial assistance for businesses through loans or by purchasing company stakes, while providing investors the opportunity to partake in the investment.
Key Takeaways
- A Business Development Company (BDC) is a type of publicly traded private equity firm that invests in small-and mid-sized businesses. This allows these businesses to grow during the early stages of their development.
- BDCs are required by law to invest at least 70% of their assets in private U.S. companies. This mandate is set by the U.S. Securities and Exchange Commission (SEC) to ensure that funds are directed towards developing businesses in need of financial support.
- Investors can buy shares in a BDC, just like they would in a regular corporation. This makes BDCs an attractive option for investors as it provides them with a way to invest indirectly in budding companies that might not otherwise be accessible.
Importance
A Business Development Company (BDC) is crucial in the finance sector as it plays a huge role in financing small to mid-sized businesses. By offering funds and guidance, these companies support the growth and sustainability of businesses that may not have access to other financing sources due to their size or stage of development.
BDCs are regulated by the U.S. Securities and Exchange Commission, which ensures transparency and investor protection.
Furthermore, as a publicly traded company, a BDC provides investors with the opportunity to invest in private equity-type investments, which can diversify an investment portfolio. Therefore, BDCs not only contribute to economic development and job creation but also offer investment opportunities.
Explanation
A Business Development Company (BDC) serves a significant role in the financial and business aspects by providing a platform to aid small-to-medium sized firms which are yet in their developing stages. The purpose of BDC is to assist these companies that have good potential but are currently deficient in the funds required to scale their operations, invest in strategic initiatives or navigate periods of financial distress.
Instead of gaining this capital from traditional sources such as banks which may impose onerous or stringent lending standards, these struggling businesses can access much-needed funding via BDCs. The financing provided by BDCs can be used in a variety of ways by recipient firms.
They may utilize it for growth initiatives such as research and development, expansion into new markets, augmentation of operational capacity, or business acquisitions. Alternatively, the funding can help bolster a company’s financial status, providing working capital to maintain ongoing operations or stave off bankruptcy in periods of financial hardship.
To sum up, the primary usage of BDCs is to promote entrepreneurial activity by financing linchpin smaller firms that might otherwise struggle to acquire necessary financial support.
Examples of Business Development Company
Ares Capital Corporation (ARCC): Ares Capital is a leading Business Development Company based in New York. They provide a wide range of financial solutions such as loans, investments, financial advisory, and asset management services. They typically work with middle-market companies, providing capital for buyouts, acquisitions, recapitalizations, and restructurings.
Prospect Capital Corporation (PSEC): Based in New York, Prospect Capital is another typical Business Development Company that operates by providing capital and financial help to private companies. They offer a structured financing strategy which includes investments in debt and equity such as secured and unsecured debt, mezzanine debt, and private equity.
Apollo Investment Corporation (AINV): Apollo Investment Corporation is a closed-end, non-diversified management investment company that has elected to be treated as a Business Development Company. It primarily provides direct equity capital, mezzanine and senior secured loans, and both non-control and control equity positions. The company works with middle-market companies in various industry sectors such as manufacturing, business services, healthcare, and information services.
FAQs for Business Development Company
What is a Business Development Company?
A Business Development Company (BDC) is an organization that invests in and helps small- and medium-size companies grow in the initial stages of their development. BDCs are typically publicly traded and are a source of investment capital.
What is the role of a Business Development Company?
The role of a BDC is to support the growth and development of small to medium businesses by providing funds for those businesses, which are needed to operate, grow, and succeed. They also often provide managerial assistance.
Where do Business Development Companies invest?
Business Development Companies primarily invest in small and medium enterprises (SMEs) that are in need of capital for growth, development, and modernization. They also often invest in distressed firms and provide funds to assist them in getting back on track.
How do Business Development Companies make money?
BDCs make money by investing in companies and then earning a return on their investments, either through interest and dividend income or through an increase in the value of their equity investments.
Can individuals invest in a Business Development Company?
Yes, BDCs are typically publicly traded companies, and as such individual investors can invest by buying shares of BDCs on public exchanges. Investing in a BDC allows individuals access to a diversified portfolio of small and medium-sized businesses.
Related Entrepreneurship Terms
- Investment Adviser
- Private Equity
- Portfolio Companies
- Risk Capital
- Regulated Investment Company (RIC)
Sources for More Information
- Investopedia: This website is a reliable source for learning about various finance terms including Business Development Company. They offer clear and simple definitions, along with examples and related content.
- U.S. Securities and Exchange Commission (SEC): SEC is the regulator for the U.S. financial markets. They have a lot of information about public companies, including Business Development Companies.
- Fidelity: Fidelity is a well-known investment firm that provides lots of educational content about different types of investments, including Business Development Companies.
- Forbes: Forbes is a leading source for reliable news and updated analysis on Business Development Company. Read the breaking coverage and top headlines on Forbes.com.
