Business development companies (BDCs) were authorized by an act of Congress in 1980 to promote funding for small and mid-size businesses. Similar to mutual funds, BDCs pool investors’ capital and then invest through loans to private companies.

The loans made by BDCs are generally floating rate loans, which are usually secured by assets of the borrowing corporation. This is important for the security of the investment. By having a contractual agreement which is at the top of the capital structure of a corporation, a return of a good portion of the loaned funds is likely, even in the event of a bankruptcy.

Keep in mind that stockholders generally lose their entire investment in a bankruptcy, while lenders like BDCs may come out whole at best, but with at least 50 to 70 percent, if the loan was secured properly. At times, it may also be possible for the BDC to gain equity interest in the business entity as part of the loan negotiation, which increases the chance for profit, assuming the borrowing firm prospers.

At present, BDCs offer an interesting opportunity after some significant regulatory changes. Following the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress to try to prevent a repeat of the serious event which endangered the economy, and retirement savings of citizens. The act changes the capital requirements for banks, which formerly were the major source of loans to small and mid-size businesses. It is now harder for banks to create and hold these loans on their books following Dodd-Frank.

BDCs, already around for decades, now have the opportunity to step in to be the lender of choice and with less competition from banks, demand higher rates of interest on the loans. Today, yields on BDCs range from 6 to 9 percent, and are based largely on floating rate loans which will pay more when interest rates rise.

Many business development companies are publicly traded on an exchange, meaning you can buy shares in your brokerage account just like buying shares of any stock. The prices of traded BDCs will also fluctuate like stocks as supply and demand for the shares come and go.

Other BDCs are non-traded. Non-traded BDCs have a lot less price fluctuation because they are not priced by investors buying and selling activity. Rather, the price is determined by the value of the loans in the portfolio. Non-traded BDCs are less liquid, meaning that you can only request to redeem your shares during certain windows of time, usually once a quarter.

Buyers of non-traded BDCs should also be careful how the shares are purchased. Many have high levels of commission and organizational fees built in, which benefit the broker and firm which are selling the shares. It is possible to purchase non-traded BDCs through registered investment advisors and avoid these up-front charges.

In summary, while BDCs still carry risk, they may be worth considering for a portion of your portfolio, based on the following considerations:

• Attractive yields that will rise if the general level of interest rates rise in the future;

• Majority of holdings are secured by corporate assets, making them less risky than stocks;

• Opportunity to profit from the 97 percent of companies in the U.S. which are not publicly traded.

As always, we suggest conferring with your advisor on whether business development companies are appropriate for a portion of your portfolio.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.