Non-diluting startup funding is the holy grail for nearly every founder seeking investors. But while it’s great in theory, in practice, non-diluting startup funding is incredibly difficult to find. But for startups and early-stage firms looking to create jobs and economic opportunity, there is one non-diluting startup funding option worth exploring—the New Market Tax Credit (NMTC) program. While technically, NMTC funding is not entirely non-diluting, the program offers many startup funding options including low- or zero-interest loans or investments that take a very small equity portion.
As an investor, risk has always been a factor when choosing which businesses to invest in. Oftentimes, investors tend to focus on flourishing business districts, which are more capable of providing promising returns. This leaves weaker communities with less opportunities for capital funding, and consequently, opportunities for economic growth.
The New Market Tax Credit Program is administered by the Community Development Financial Institutions (CDFI) Fund in the Department of Treasury. The program aims to combat the existing disadvantage by providing incentives to equity investors in the form of tax credits. A certain amount is subtracted against the investors’ federal income taxes. The credit is spread over a period of seven years, equivalent to 39% of the investment given – 5% in the each of the first three years, and 6% in each of the following four years.
Through the NMTC program, certified intermediaries, called Community Development Entities (CDEs) are the ones that receive the funding, and therefore must invest primarily on low-income communities and individuals. This program highlights two key personas: first, investors who seek reductions to federal income taxes, and second, CDEs which can grant tax credits to investors.
In this article, we outline the steps for applicants to be certified as CDEs by the CDFI under the NMTC program. The steps are outlined in the following sections.
Step 1. Certification: A Community Development Entity (CDE) is a corporation or partnership in the United States that shall act as a mediator and give access to loans, investments, as well as financial counseling to low-income communities or individuals.
The applicant must be a legal entity at the time of application, have a primary mission of serving low-income communities, and shall maintain accountability to its constituents. Being certified as a CDE allows the entity to apply for the NMTC Program.
Step 2. Application: CDEs are eligible to apply for the program. They can refer to the Notice of Allocation Authority (NOAA), which outlines program priorities, selection criteria, and other information relevant to the application process in the current allocation round.
Step 3. Award Announcement: A Notice of Allocation is sent to qualified CDEs for their confirmation. This document includes the general terms and conditions that govern the CDFI’s allocation. Likewise, a declination letter is sent to unapproved applicants. The applicants who are awarded the allocation is final, and no appeal will be entertained.
Step 4. Allocation Agreement Closing: Allocation awards for the previous round are usually held within the first quarter of the next calendar year. And Allocation Agreement is given, which includes the specifics of the award such as the amount of NTMC allocation and allowed usage, locations of the low-income communities that can be covered, and the schedule for compliance documents.
Step 5. Compliance and Reporting: CDEs must verify if investments fall within the prescribed rules and regulations, and thus be tagged as Qualified Equity Investments. Furthermore, it is also their responsibility to ensure that the QEIs are placed in Qualified Low-Income Community Investments (QLICI).
Conclusion: Once their funding has been allocated, CDEs are the entities that provide the non-diluting startup funding. However, it is important to note that not all startups or early-stage firms are right for the NMTC program. Entities that receive the non-diluting startup funding through the NMTC program must meet strict requirements in terms of job creation and economic development in low-income communities.
Unlike other tax credit programs, the New Market Tax Income Program is designated as a non-permanent program, and thus needs to undergo renewal during each Congress session. Timeliness will be a consideration, so interested applicants should apply as soon as the opportunity arises. Check out the CDFI website if you are interested in learning more about the NMTC program to see if its non-diluting startup funding options are right for you. The New Market Tax Credit Coalition also has some great information about the program.
