Business Development Companies (BDCs) are incredibly important to the growth of the middle market sector of our economy. BDCs provide critical capital and managerial expertise to middle market companies in order to purchase equipment, hire new employees, increase inventory, and expand their facilities. Access to capital is key to growing revenues, and middle market companies continue to rely on BDCs to access capital to grow their revenue base.

Before we dip into why improving the regulatory structure of BDCs will help get more capital to middle market companies, it will be important first to take a look at the state of the economy of the middle market sector. According to the National Center for the Middle Market, approximately 57 percent of middle market companies are growing their revenues, and nearly one-third of middle market companies expect to grow the employment base of their firms in the next year. The Middle Market Indicator for the 4th Quarter of 2015 signals that middle market companies grew their revenues by 6.1 percent and grew their employee base by 3.6 percent over the past year.These are all strong numbers and BDCs are proud to invest in middle market companies to help them keep growing.

It is also important to describe the total BDC landscape and also what sectors they are investing in across the country. According to data provided by AdvantageData, commitments by BDCs into U.S. companies as of the end of September 2015 topped out at $76 billion. The top industries receiving commitments from BDCs, according to AdvantageData, are the services industry ($22 billion), finance/insurance ($16 billion), manufacturing ($16 billion), transportation/communication ($6 billion), and mining ($5 billion). These industries are the heartbeat of the American economy, producing jobs, goods, energy, and services for millions of businesses and consumers across our country.

Now let’s examine the current regulatory environment for BDCs. Because as more and more middle market companies continue to rely on BDCs as their capital provider, we would argue that modernizing the regulatory regime for BDCs will have the most impact on the companies BDCs serve. BDCs are heavily regulated by the Securities and Exchange Commission (SEC). When BDCs were created in 1980, they were placed in a unique and somewhat unwieldy structure of being governed like a mutual fund through the Investment Company Act of 1940 (’40 Act), while also having many requirements imposed on them similar to operating companies (such as making periodic 10-Q and 10-K filings with the SEC).

Congress can improve the ability of middle market companies to access capital by making it a priority this year to pass the “Small Business Credit Availability Act of 2015”. The bipartisan legislation is the result of the tireless work by the bill sponsor, Congressman Mick Mulvaney (R-SC). Joining him as cosponsors are Congressman Brad Sherman (D-CA), Congressman Dan Kildee (D-MI), Congressman Steve Stivers (R-OH), Congressman David Schweikert (R-AZ), Congressman Bob Dold (R-IL), and Congressman Robert Pittenger (R-NC).

The Small Business Credit Availability Act, which already passed the House Financial Services Committee in 2015 by a resounding vote of 53-4, would modernize the regulatory landscape for BDCs, enabling them to deploy more capital to small and medium businesses. BDCs are currently limited to a 1:1 debt-to-equity ratio, and if the statute is changed it would allow a modest increase in their leverage ratio. The legislation also provides ample investor protections so that BDCs would need board or shareholder approval before increasing their leverage ratio.

BDCs are also forced to unnecessarily comply with outdated regulations at the SEC that were written more than 35 years ago. The current BDC rules require heavy paperwork burdens, long filing times for offering registration due to the lack of shelf registration, and they limit the information and communications that BDCs can engage in with research analysts and investors.

The Small Business Credit Availability Act of 2015 would streamline their compliance and paperwork burden, with no reduction in the amount of information available to investors. If Congress can act this year to modernize rules for BDCs, we fully expect the end result will be more capital to middle market companies. BDCs are going to continue to be a featured capital provider for this sector. We just need Congress to help out by passing bipartisan, commonsense legislation that will impact the middle market sector for years to come.

Brett Palmer is the president of the Small Business Investor Alliance.

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