What is a business development company?

Often, small startup companies are incubated by a business development company.

A business development company, also known as a BDC, works to foster or incubate small businesses or businesses that are just starting out. A BDC is similar to a venture capital (VC) fund, but while a VC fund is private, a business development company is publicly traded. In other words, business development companies typically sell stocks on public indices such as the S&P, AMEX and NASDAQ.

Some large business development companies coordinate investments for several private companies.

Business development companies generally must adhere to the standards and regulations set by their country’s government. In the United States (USA), for example, a business development company must adhere to the regulations established by the Investment Company Act of 1940. These rules state that such a company may invest only in private entities, as opposed to publicly traded businesses. In addition, they must file quarterly and annual reports with the US Securities and Exchange Commission. Rules for specific regions and countries can usually be found through an internet search.

Some large business development companies coordinate investments for several private companies. Other companies have in-house departments that provide venture capital funds. VC funding and business development company funding serve to incubate small businesses and investments. The objective is to fuel new ventures into productive businesses and then reap a long-term return by profiting from equity shares. Companies that work to provide these types of business incubators often take on multiple roles; some can assist in building a business plan, setting a budget, creating production schedules, or any other practical task. Other companies or funds may be created to provide capital only, or they may offer basic advice and certain important business services.

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To qualify as a business development company, an entity typically must meet standards for diversifying its holdings and, in the United States, must collect at least 90% of gross taxable income from the sale of bonds or stock. A business development company may also employ something called mezzanine financing, which involves raising money for a company that is working but not yet open; this type of financing can also apply to business expansions that are in the planning stages but not yet operational. Some critics of business development corporations likened them to Ponzi schemes. Advocates of business development companies claim that funds democratize the investment world by allowing individuals to share in the wealth generated by the incubation process.

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