The Eastern Kentucky entrepreneur community is on the rise. As you consider whether you could one day be a small business owner — or you’re already hustling to grow your existing operation — SOAR Innovation has resources to help.
We’ve recently been reviewing funding opportunities on the SOAR blog. Our experts have discussed how to prepare to get funding and know which type(s) of funding are right for you. Today, we’re continuing the conversation and exploring alternative business financing.
You may already be familiar with the most typical sources of investment for small businesses, including traditional loans, angel investments, and CDFIs.
SOAR also recently highlighted 3 alternative business financing opportunities: EPADs, Opportunity Zones, and New Markets Tax Credits. They can help you fill out a funding round, secure more favorable terms, and encourage increased investment throughout Eastern Kentucky.
Let’s explore precisely how alternative business financing can be a helpful addition to an entrepreneur’s funding stack.
What is the EPAD program?
Energy consumption is a necessary expense for brick-and-mortar businesses. Keeping those costs down can support greater profitability. But energy costs are rising: coal and oil prices have gone up as high as 50% in 2022. Energy efficiency is in any savvy business owner’s best interest.
This is where the EPAD program comes in. EPAD stands for Energy Project Assessment District — and this program incentivizes energy conservation-related construction projects.
Property Assessed Clean Energy (PACE) is the financing mechanism with favorable terms for facility and business owners. You can use PACE funding to perform energy efficiency upgrades and install renewable energy and water conservation systems.
What types of businesses or projects are eligible for the EPAD program?
EPAD-eligible businesses include commercial, agricultural, industrial, and multi-family property owners.
The project must align with energy conservation goals. The EPAD program follows an open-market contractor approach, which means you can work with any contractor you choose. If you switch contractors after you apply to the program, you’ll have to submit them for approval.
Sample projects may include:
- Upgrading HVAC systems to reach energy conservation targets
- Installing bathroom facilities that conserve water
- Upgrading commercial lighting fixtures to LEDs
To learn more about the EPAD program, check out the program website.
PACE funders working with Eastern Kentucky small businesses include Donovan Energy and KY PACE.
The Mountain Association is another strong ally for small businesses pursuing energy efficiency. They’ll assess your energy consumption and help you understand where you can invest to maximize your savings. Plus, their services are free of charge.
What are Opportunity Zones?
The Kentucky Cabinet for Economic Development facilitates the Kentucky Opportunity Zones program. It provides benefits for startups in economically-distressed areas that meet specific criteria. The program incentivizes investors to place existing capital gains into Qualified Opportunity Funds (QOFs) and offers tax breaks in exchange.
Most of Eastern Kentucky falls within an Opportunity Zone. There are 144 Opportunity Zones across 84 Kentucky counties.
Who is eligible for Opportunity Zone funding?
If you want to find out if you’re qualified, first check if your business is located inside an Opportunity Zone. You can input your business address into this map to find out if you’re eligible.
If you are, the next step is to get in touch with a QOF. Some QOFs work exclusively with Kentucky, or you can identify funds that operate nationwide.
Typically, QOFs will focus on a particular industry, specialization, or clusters of adjacent business types. Find one that aligns with what you do, and reach out with a brief, compelling pitch email that catches their attention.
What are New Markets Tax Credits?
The New Markets Development Program Tax Credit incentivizes taxpayer investment in low-income (and often rural) communities.
If an organization would like to participate in the program, it must apply with the Kentucky Department of Revenue to obtain community development entity (CDE) status. CDFIs, traditional banks, developers, and local governments may qualify as CDEs.
Once approved, they can make a qualified investment in a small business or local organization: long-term debt security or an equity exchange.
From here, the Kentucky Department of Revenue issues a New Markets Tax Credit to the CDE for up to $10 million of that qualified investment. They’ll get up to 39% of their investment back over the next 7 years.
Who can benefit from New Markets Tax Credits?
While the tax credit doesn’t go directly to entrepreneurs, they still benefit from the New Markets Development Program. It encourages investors to pay close attention to entrepreneurial activity in communities like ours.
Between 2003 and 2020, the program supported at least $66 billion in investments across the US.
And the types of debt financing offered by CDEs are typically more favorable for small business owners. You should be able to count on lower interest rates, loan origination fees, and debt coverage ratios.
Take a look at the US CDFI Fund to find a database of CDEs and potentially locate a new investor for your organization.
And be sure to check out Advantage Capital, a CDE located in Kentucky. They’ve expressed a commitment to supporting growing businesses in our region.
How can entrepreneurs leverage alternative business financing?
If you’re asking angel investors, venture capitalists, or banks for a loan or equity investment, using one or more of these sources can help sweeten the deal.
They’ll know you’re savvy when they see that you’ve leveraged alternative business financing. Typically, it’ll mean you sourced low-cost loans or equity deals with highly favorable terms.
It’s also always a good plan to diversify your capital stack. This practice can improve your loan terms with a bank. It makes difficult-to-fund projects more attractive to potential funders. And it spreads out your risk and obligations across several entities.
So if you qualify for any of these types of alternative financing, make sure you put them at the top of your list when making a funding plan for your business.
Conclusion: Get funding for your startup
SOAR Innovation — powered by Kentucky Innovation — supports new business owners with resources, guidance, and a network of like-minded community members.
Contact SOAR today to learn more about your financing options as a business owner and request an introduction to one of our many funding partners in the field.