What exactly is a business development company?
Business development companies, or BDCs, are publically registered companies that provide funding to small and mid-sized businesses. After congress passed the Investment Company Act in 1940, congress created business development companies in 1980. These companies are normally publically traded and invest in public and private companies with low trading volumes. These companies can be compared to a cross between an operating company and your average investment company. They hand out loans to companies under their portfolio that can be publically traded without back-end fees or other restrictions. Whereas venture capital firms or private equity companies typically are geared towards wealthy investors, BDCs allow anyone to purchase shares and operate in the open market.
Most business development companies decide to be treated as RIC (regulated investment companies) for tax purposes. As an RIC, these companies have to distribute at minimum 90% of their taxable income to their shareholders each year. To obtain these tax benefits, these BDCs also must follow the rules regulations of the Investment Company Act of 1940 and follow RIC diversification requirements each quarter. The Investment Company Act limits the debt that a company is able to incur, prohibits affiliated transactions, requires that a company is regularly examined by the SEC and follows through with their compliance program.
BDCs have recently been shown to have higher distribution yields than the average fixed income investments. The average market yield on the business development companies paying a dividend is over 9%. Many investors have been putting their money into business development companies these days without looking at the high risks associated with the elevating higher yields for BDCs.