Access to capital is critical for small businesses. Whether you’re a brand new startup or an established company exploring ways to grow, this is true.
There are a number of ways to source funding for your business. But sometimes, the traditional approaches don’t offer everything you need — such as the right amount of cash or favorable terms.
If you’re a small business owner in Eastern Kentucky, there are a few alternative opportunities that can supplement or even fulfill your funding needs. Today, let’s take a close look at one of these programs: Kentucky Opportunity Zones (OZs).
We’ll explore what OZs are, who they serve, how they work, and how you can use this program to help your business grow.
What’s a Kentucky Opportunity Zone?
A Kentucky Opportunity Zone is a distressed area that provides incentives and benefits to encourage investors to support economic development projects.
In 2017, Kentucky identified 144 qualified census tracts in Kentucky for the Opportunity Zone program. Eligibility included a greater-than 20% poverty rate and a median family income under 80% of the statewide median.
The US Department of the Treasury approved Kentucky’s 144 Opportunity Zones in 2018. The program will remain in effect for 10 years.
How do Opportunity Zones work?
To participate in the Opportunity Zone program, investors must have existing capital gains — the value created by investments, such as through the stock market, bond market, and others.
Next, investors can use those capital gains to invest in Kentucky Opportunity Zones via Qualified Opportunity Funds (QOFs).
QOFs are made up of partnerships, corporations, banks, CDFIs, investor groups, and more.
Investors can review and choose from plenty of existing QOFs in Kentucky. QOFs are typically organized by investment types, such as:
- Real estate
- Impact investing
- Downtown revitalization
- And more
If an investor wants to set up their own QOF, they can. The investor must be a US taxpayer and submit a form to establish the fund via their federal income tax return. The IRS doesn’t need to approve a QOF application for it to go into effect.
But, once a QOF is active, the fund owners will need to comply with federal and state securities laws. It’s not advisable to set up a QOF without professional support.
Who can benefit from a Kentucky Opportunity Zone?
Opportunity Zones experience higher-than-average poverty rates. As a result, most investors have overlooked entrepreneurship activities cropping up in these regions.
But that doesn’t mean there aren’t valuable investment opportunities in OZs. Quite the opposite. Our region is teeming with promise — and programs like Kentucky OZ are helping investors recognize that.
The program seeks to encourage business growth in areas like Eastern Kentucky by making a compelling financial offer to investors. These investors receive significant tax benefits in exchange for investing in Kentucky Opportunity Zones.
For example, if an investor participates in a QOF this year, they can defer their capital gains tax bill until 2026 — or when they sell their shares, whichever comes first.
If an investor holds their QOF shares for 10 years, their capital gains tax bill is $0. For some investors, this translates to thousands of dollars in savings.
This is a win-win for everyone involved. The investor can reduce or defer their tax burden and take pride in their contributions to economic development activities. And the entrepreneur can receive an alternative source of funding that could make all the difference towards their business’ growth.
How can I find out if my business is eligible for Opportunity Zone funding?
There are 144 Opportunity Zones throughout Kentucky. Most of SOAR’s 54 counties in EKY contain at least one.
Use the KY OZ map to determine whether your business is located within an OZ.
The map shows you the census tracts that are part of one or more zones. (Remember that Opportunity Zones are organized by census tract, not county lines.)
Enter a street address in the upper right-hand corner to determine if your business’ precise location is eligible for the program.
How can entrepreneurs and small business owners pursue Opportunity Zone funding?
The Cabinet for Kentucky Economic Development (CKED) maintains a list of OZ projects currently seeking investors.
It’s worth noting that OZ investments don’t have to come from in-state investors. You should also take a look at the national list of QOFs provided by the National Council of State Housing Agencies (NCSHA).
That said, some project types will be more likely to receive out-of-state funding than others. For example, it may be challenging to source outside investments for downtown revitalization projects.
But if you’re associated with a high-growth, tech-enabled industry with significant growth potential, you’ll have a better shot at attracting them.
When you’re ready to start pitching to investors, you can list your project with CKED and NCSHA. But don’t rush into this process. Be sure to follow a systematic, well-thought-through strategy to increase your chances of receiving an investment.
The effort is similar to any other funding process:
- Develop a project listing that uses reliable data to make your business case.
- If investors take an interest in your listing and reach out to you, the next step will be to share your business plan and financials via a pitch meeting.
- And if investors are ready to commit, it’ll be important to prepare for due diligence.
Conclusion: Get funding for your Eastern Kentucky business
SOAR Innovation — powered by Kentucky Innovation— helps our community of entrepreneurs access the resources they need to grow.
From blogs and eBooks to consultative feedback on your business pitch presentations, we provide resources and direct services to help jumpstart our regional economy.
Have you read our recent blog posts on the various types of funding available to EKY entrepreneurs?
- Business Funding Part 1: Applying for Bank Loans as a Small Business Entrepreneur
- Business Funding Part 2: What Are CDFIs and How Do They Help Small Businesses in Eastern Kentucky?
- Business Funding Part 3: When and How to Tap into Angel Investing as an Eastern Kentucky Entrepreneur
Are you ready to pursue funding for your business? If the answer is yes, contact your SOAR representative today. We can review funder requirements and help you prepare for this next major step in your entrepreneurship journey.