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All About BDCs

Business Development Companies

In 1980, the U.S. Congress created a class of corporation called a business development company (BDC) to encourage the flow of public equity capital to private businesses. 

To qualify as a "regulated investment company," a BDC must invest at least 70% of its assets in private or thinly traded, public U.S. corporations, and must distribute at least 90% of its taxable income to shareholders in the form of dividends. BDCs must also make available significant managerial assistance to their client companies. BDCs often take an equity interest in their client companies which can result in capital gains when they liquidate those positions. A business development company gains an additional tax advantage if it distributes at least 98% of its ordinary income and 98% of its capital gains to shareholders as dividends.

BDCs make mostly short-term, unsecured loans in the $2 million to $50 million range. Also, they frequently take ownership positions (equity interest) in their client companies. Since they must pay out most of their profits to shareholders, BDCs must raise cash to fund expansion by selling more shares or via borrowing.

BDCs went through hard times in 2008 and early 2009 when the economy tumbled. Now, most have recovered, are financially strong, and well positioned to prosper if the economy continues to strengthen.

Here's a list of BDCs.

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