Business development company: Overview, definition, and example
What is a business development company?
A business development company (BDC) is a type of publicly traded company in the United States that invests in small- and medium-sized businesses, typically in the form of debt or equity. BDCs were created by Congress in 1980 under the Investment Company Act to promote the growth of emerging businesses by providing them with capital. BDCs serve as a vital source of funding for companies that may have difficulty accessing traditional forms of financing, such as bank loans or venture capital. In return, BDCs offer investors high dividend yields, as they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
For example, a BDC might invest in a startup company by providing them with a loan to help fund their operations in exchange for interest payments and equity ownership.
Why is a business development company important?
A business development company is important because it plays a crucial role in the economy by helping to finance and grow small and mid-sized companies. Many of these companies may not qualify for funding through traditional financial institutions or may not have access to the capital needed to scale. BDCs fill this gap by providing essential capital, often in the form of high-yield debt or equity investments, which helps businesses expand, create jobs, and drive innovation. For investors, BDCs provide an opportunity to invest in a diversified portfolio of small- and medium-sized businesses and earn attractive dividends, although at higher risk due to the nature of the investments.
Understanding business development companies through an example
Let’s say a BDC invests in a growing technology firm that needs capital to expand its operations. The BDC might provide a loan to the company at a higher interest rate than a traditional bank loan, and in exchange, the BDC could receive equity in the company as well. Over time, as the company grows and becomes more successful, the BDC benefits from both the interest payments on the loan and any increase in the value of the company’s stock.
In another example, a BDC could invest in a portfolio of companies across different industries, providing capital to startups, growth-stage companies, and those in need of turnaround financing. The BDC generates returns by earning interest on debt investments and capital gains from equity stakes, while shareholders of the BDC receive regular dividends.
An example of a business development company clause
Here’s how a business development company clause might appear in an investment agreement:
“The Company shall be classified as a Business Development Company under the Investment Company Act of 1940. As such, the Company will be required to invest primarily in the equity and debt of small and medium-sized businesses and will distribute at least 90% of its taxable income to shareholders in the form of dividends.”
Conclusion
A business development company (BDC) is a unique investment vehicle that provides funding to growing businesses that might otherwise struggle to secure financing. By investing in small- and medium-sized businesses, BDCs help foster growth, innovation, and job creation while offering investors the opportunity to earn high yields through dividends. However, investing in BDCs can involve higher risks due to the nature of their investments, making it important for investors to understand the potential rewards and risks involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.