Funding is a make-or-break factor for any startup. But historically, coastal investors have overlooked entrepreneurs in our region.
But this track record doesn’t speak for the Eastern Kentucky small business community.
Current and future entrepreneurs are developing promising new businesses throughout Appalachia, and the momentum for this community is rising.
SOAR is here every step of the way for our entrepreneur community. One of our top goals is to make it easier for you to access the financial resources you need to grow.
We’ve recently examined two alternative funding methods: the EPAD program and Opportunity Zones. We also created small business loan, CDFI, and angel investing guides. If you haven’t read them yet, we recommend you do.
Today, we’re discussing yet another alternative funding opportunity: New Markets Tax Credits (NMTCs).
New Markets Tax Credits present significant benefits to EKY entrepreneurs. But what are they? And how can you use them to benefit your growing business? Keep reading to learn how you can use this program to your advantage.
What are New Markets Tax Credits?
The New Markets Development Program Tax Credit is a program administered by the Kentucky Department of Revenue (KDOR). It incentivizes investments in businesses located within high-poverty and (often) rural communities by offering a financial benefit to participating investors.
How it works: The Kentucky Department of Revenue issues a New Markets Tax Credit to community development entities (CDEs) for qualified investments of up to $10 million. The CDE investor is eligible to receive up to 39% of said investment in the form of a tax credit, which they collect over a period of 7 years.
To become a CDE, a legal entity must file with the KDOR. According to the US Department of Revenue, a CDE must primarily serve low-income communities and maintain accountability to those communities’ residents. Their mission must align with serving the greater good.
Because they serve communities like ours, CDFIs are often the types of organizations that qualify and receive certification as CDEs. But other organizations may also apply and receive CDE status, including traditional banks, credit unions, development groups, and nonprofits.
Which regions are eligible for NMTCs?
As a business owner, you’re probably wondering whether your business might be able to benefit from the NMTC program.
This map is a helpful tool to find out if you’re located in an eligible region. It uses data from 2011-2015 to identify NMTC program eligibility.
The program looks at census tracts and categorizes them into a few categories.
- “Qualified” means the tract meets the essential criteria.
- “Severe distressed” means the tract goes above and beyond the essential criteria.
If your business location is within a qualified or severe distressed tract, you should be eligible for investments from CDEs.
Who can benefit from New Markets Tax Credits?
Investors can benefit directly from New Markets Tax Credits by paying fewer taxes. But they also have a vested stake in the region where they’re making these investments.
Improving economic outcomes for one or several regional businesses can have a powerful ripple effect. When more businesses succeed, this outcome attracts other entrepreneurs to launch their own ideas or other established companies to move into the area.
Sparking entrepreneurial activity is what the NMTC program is all about.
While the entrepreneurs who receive investments don’t personally receive tax credits, the NMTC program offers several benefits to help with the funding process for small businesses. Many of these benefits include favorable terms for debt funding, such as:
- Lower interest rates
- Lower loan origination fees
- Subordinated debt, or a loan that ranks below other types of debt in bankruptcy court
- Lower debt coverage ratios
- Longer maturities
The flexible terms provided by CDEs can help entrepreneurs access the funding they need without needing to make as many compromises as with traditional methods.
How to locate eligible CDEs
If you’re hoping to partner with a CDE for your next funding round, the US CDFI Fund maintains a database of CDEs participating in the NMTC program.
This listing rounds up CDEs across the US that may or may not still have funds available for equity investments in qualified organizations.
You can search for CDEs making in-state, multi-state, or national investments and filter the results to Kentucky if you want to keep it local.
In many cases, it’s best to work with CDEs located already serving Eastern Kentucky. They’ll most likely already understand what challenges you’re up against. Plus, they’ll already have skin in the game to uplift the circumstances for our shared region.
Meet 2 CDEs serving Eastern Kentucky
Based in Lexington, Community Ventures has helped 5,000 entrepreneurs start or expand their businesses, with an estimated 10,500 jobs created as a result.
They’re known for supporting business loans for women-owned, minority-owned, and veteran-owned businesses. Community Ventures also frequently partners with companies in Eastern Kentucky. They issue loans between $500 and $5 million.
The Kentucky Highlands Investment Corporation (KHIC) has a mission of supporting economic and job growth in Southeastern Kentucky. They have a lending program, make equity investments, and provide resources for up-and-coming entrepreneurs in the region.
The KHIC has invested over $356 million since 1968. They estimate that over 22,000 jobs were created or maintained due to their financial and managerial partnerships in Southeastern Kentucky.
Conclusion: Become a funding and grants expert
There are more ways than ever to receive funding for your growing organization. But application requirements can be tricky — you need an expert in your corner who can help guide the way.
The Grants 101 Playbook for Eastern Kentucky will help you become a funding and grants expert. You’ll learn how to prepare for funder requirements, seek out qualified opportunities, and optimize your applications based on the latest best practices.
Download the guide today to level up your organization’s grant application capabilities.
Once you start preparing your applications, contact SOAR to receive constructive feedback and insights from our team of grants and funding experts.