The Venture Capital InfusionsFederal incentives mean more money for VC firms--but what do they mean for you?

It's not often that America's small businesses get $2 billion in federal funds set aside just for them. But that's what happened when President Obama signed the American Recovery and Reinvestment Act this February.

Better known as the stimulus bill, the ARRA changed the rules for a little-known SBA program that loans money to qualified VC firms called Small Business Investment Corporations, or SBICs. SBICs, which are licensed by the SBA as federally funded VC firms, can tap SBA funds to supplement the venture capital they've raised privately, taking twice as much federal money as they've raised on their own, up to a limit.

The 50-year-old program pays for itself through fees and loan payments by the SBICs. The program has loaned more than $50 billion over the years to companies including Apple, FedEx and Outback Steakhouse.

All of the funds given to an SBIC must be used to fund small businesses, which the SBA defines as companies with no more than $18 million in net worth, or $6 million in after-tax income in the prior two years. Any business fitting this description can approach SBICs for funding. Within this pool, some of the funding each SBIC gets must go to "smaller" businesses, which the SBA defines as having no more than $6 million in net worth and an after-tax profit cap of $2 million.

Another plus to the program: the SBA makes sure a diverse group of venture firms are included in the SBIC pool, so there are VCs interested in funding small businesses in virtually every sector and funds focused on every investment stage--from startups needing seed capital to mature companies seeking money for growth initiatives.

$2 Billion Rule Changes
Restrictions on the SBIC program meant only $1 billion of the $3 billion available for loan to the SBICs was used last year. Few new SBICs have been approved in recent years due to a long and difficult qualifying process. Plus, funding limits stopped existing SBICs from borrowing more.

Among the rule changes intended to put more SBIC money into circulation: