Financial and non-financial economic development incentives influence business retention in certain locations. These government incentives play a huge role in job creation. So, what are these incentives, and can they help startups?
One of the most common concerns for early-stage startups is securing operating capital. Researching, developing, and marketing new products and services are time and resource-consuming. Hence, many startups and small businesses can’t finance through their revenue alone. That is why entrepreneurs look for funding sources like venture capital.
One of the most overlooked ways for businesses to optimize cash flow is through economic development incentives. These incentives are a way for governments to help businesses finance their needs. Although less known, they are handy to fuel growth, especially for startups.
So, what are economic development incentives? How do they help startups? And, where can entrepreneurs find them?
What are Economic Development Incentives?
Economic development incentives are financial and non-financial benefits that federal and local governments offer to businesses. Every year, governments spend billions of dollars on economic development incentives. They use these incentives to attract, keep, and grow businesses in their localities.
In 2020, 95% of US cities offered incentives for economic development. Also, each city or state has incentive programs to attract businesses. Governments are investing public resources to make private investments more workable. In return, their cities or states receive positive economic impacts.
Types of Economic Development Incentives?
There are two types of economic development incentives. First are incentives that are automatic or created by the government. These are generally tax incentives.
For example, a company automatically qualifies for tax exemptions when it buys specific equipment. The second is discretionary ones. These incentives are tax, or economic benefits worked out between the government and the business.
Generally speaking, there are hundreds of economic development incentives depending on the government or public entity. Here are the most common ones.
There are two types of economic development incentives. First are incentives that automatic or created by the government. These are generally tax incentives. For example, a company automatically qualifies for tax exemptions when it buys specific equipment. The second is discretionary ones. These incentives are tax or economic benefits worked out between the government and the business.
Generally speaking, there are hundreds of economic development incentives. Depending on the government or public entity, here are the most common economic development incentives available.
Income Tax Credits
These are refundable or non-refundable tax breaks available to private enterprises for job creation or capital investment. Companies can also receive deductions, exemptions, or exclusions from tax to invest back in their businesses.
Small Business Grants
These are funding and subsidies provided to private entities that are developing new projects. The programs aim to promote entrepreneurship in specific industries.
Tax exemptions on business activities done in state or local development zones. These incentives encourage entrepreneurs to invest in low-income communities.
Low Interest or Forgivable Loans
State and local governments allow private companies to borrow money for capital investment. In addition, these loans are on friendly terms suited to the capability of the borrowers.
Job Training Funding
Companies receive funding for training new employees. This is also applicable for financing companies to keep employees and teach them skills.
These are benefits given to emerging technologies or companies that work with their customers and vendors to save energy. These usually involve rebates on energy-saving equipment purchases.
Tax Increment Financing (TIF)
TIF works by refunding companies a portion of their taxes. It works by subsidizing private development expenses to develop the area. For example, TIF funds job training programs, building renovations, or planning expenses.
The programs above are just a few of the different economic development incentives governments provide for businesses. However, many of them may not fit your startup business needs. Startups and small businesses have different needs. The following economic development incentives are the most likely to be granted to startups:
Startups usually operate with thin profit margins. And, startups use a big part of their budget to pay taxes instead of product and employee development. State and local governments understand this. That is why they are offering tax credit incentives aimed to address this problem.
In fact, through tax credits, governments will waive, refund, or reduce fees for companies. But first, these companies should show that their tax credits will help the community. For example, your startup plans to expand and hire more employees. You can work with the local government to invest in hiring and training more employees for a tax credit.
Finding and keeping skilled and experienced talent is one of the significant problems that startups face. This is especially true in the tech sector. Because technology jobs are rising across the US, finding skilled workers in the industry is hard.
As a result, state and local governments are helping to close the skills gap in the industry. Aside from funding tech programs in universities, local governments also offer training grants. This economic development incentive aims to lower the cost of onboarding employees.
These are just two of the economic development incentives available for startups. In addition, depending on your startup’s current needs, you may need to apply for one or more grants
How to Find Them?
The first step in finding economic development incentives is to know which local government unit is responsible for economic development. Once you are familiar with them, visit their websites or reach out to inquire about the incentives that they offer. Here are some of the websites you can browse to find government subsidies and incentives:
- State Business Incentive Database
Secondly, make sure to study the eligibility and other requirements. Make sure that your startup is qualified for the incentives that you are applying for. Additionally, prepare your business plans and other requirements to proceed with your application.
Most of the time, you will be asked to present your startup plan. Make preparations and pitch your business as best as you can. Moreover, you can also work with financial advisory firms or tax consultants to help negotiate the best incentives for your startup.
Local and state governments offer economic development incentive programs to help startups. These government incentives provide great opportunities for startups to optimize their cash flow. Hence, these economic development incentives will help your startup maximize its available spending options.
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