A unique option for small business funding

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

In this age of entrepreneurship, there is a conversation buzz occurring across the country about the proverbial financing needs of businesses. From creating angel investing groups, understanding how to secure debt financing to talking about whether the banks are lending, it is clear that financing entrepreneurial small businesses has been and will continue to be a challenge. Even larger companies have experienced capital cash flow struggles for the first time in this economy.

With the capital crunch we have seen, new methods of financing projects have risen over the years. One program that has been available across the country for several years is currently available in Arkansas. Through the Community Development Financial Institution Fund (CDFI), the New Market Tax Credit (NMTC) permits taxpayers to receive a credit against their Federal income taxes for making qualified equity investments in designated Community Development Entities (CDE).

According to the CDFI, “all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. The four final years, the value of the credit is six percent annually.”

This program was established to support the capital needs of businesses located in low-income communities. The program partners businesses with investors willing to risk their capital into the investment. The tax credit allows the investor to gain a short-term benefit through his/her Federal income taxes while the businesses receive the equity capital needed for sustained operations.

While the establishment of the business to investor relationship is more complex than traditional forms of obtaining funding, the first step for businesses is to see if the business location qualifies and seek CDE certification. To qualify as a CDE an organization must:
• be a domestic corporation or partnership at the time of the certification application;
• demonstrate a primary a mission of serving, or providing investment capital for, low-income communities or low-income persons; and
• maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.

For more information about the New Market Tax Credit program in Arkansas, contact the Heartland Renaissance Fund at (501) 374-9247.

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Stockman can be reached at [email protected]