Kentucky Business Financing and Tax Credits

About Business Grants, Loans, and Venture Capital

Generally speaking, there are few small business grants providing funding for business startups that need not be paid back. This is true irrespective of the applicant’s race/ethnicity, gender, or economic status. Those grants that do exist are usually available to highly specialized fields of science/technology, schools/training programs, or depressed geographical areas.

Government grants are somehow designed to expand the economy or otherwise address societal problems. Government grants may take the form of tax credits. The tax credits may be provided for a period of years to attract businesses that otherwise would not have located or expanded within the state or locality.

Grant applicants face competition for the limited funding available and must meet stringent eligibility requirements. The grant-making organization may require the recipient to put down matching funds or agree to perform required activities or else the grant money must be returned.

Business loans are more readily available but also come with conditions. Lenders will often scrutinize the entrepreneur’s personal investment in the business, his or her credit history, and existing business collateral. As with grant applications, the entrepreneur will need to have a superb business plan that demonstrates knowledge of the target market, detailed revenue and expense projections, etc. to have any hope of securing a loan. The plan should show how the business will be able to repay the loan in a timely fashion.

A business loan will usually not be sufficient to fund the entire startup. Most banks and commercial lenders expect the business owner to provide some equity in the form of personal savings, loans from relatives/friends, etc.

Venture capital is a final source of potential startup funding, though venture capitalists generally prefer to provide funding to established and growing firms which are more proven. Venture capitalists are private investors who will expect high rates of return, ownership or management positions, a profit percentage, etc. in return for up-front capital necessary to expand the business. In some cases, government agencies match entrepreneurs with venture capitalists or back the loans provided by venture capital to some degree.

Importance of Small Businesses

Nationally, small businesses represent 99.7% of all employer firms, employ over have of all private sector employees, and have generated 64% of net new jobs over the past 15 years. Small businesses are similarly critical to the Kentucky economy. More than 90% of Kentucky businesses have fewer than 50 employees.

Small business growth and expansion provides a natural boost to stagnant economies. For instance, when 100 jobs are added, the Kentucky economy is impacted by $4-40 million, depending on the industry where the jobs were added. Consequentially, the state has an incentive to encourage small business expansion. Kentucky has made this a recent priority, as evidenced by House Bill 3, Incentives for the New Kentucky, which created business incentive programs and improved existing ones to foster new job growth in the state.

Kentucky has always been an attractive state for small business startups and expansion. Kentucky is located in the center of the eastern United States (the area east of the Mississippi River), a day’s drive from many major U.S. cities. It offers a temperate climate and relatively low cost of living. Nationally, Kentucky has the 9th lowest overall costs of business among all states based on unit labor cost, energy index, and tax burden. Recent emphasis on state tax incentives and loan programs has made Kentucky an even more attractive state for emerging small businesses.

Some of the Financing Programs Available to Kentucky Businesses

Grants

  • Federal – the federal government does not provide grants to private individuals wishing to start or expand a business. Some federal grants are available to non-profits, educational organizations, and state and local governments.
  • Kentucky – Small Business Investment Credit (KSBIC) Program
    Up to a $25,000 Kentucky state income tax credit to eligible small businesses hiring 1 or more eligible employees and investing at least $5,000 in qualifying equipment/technology.
  • Kentucky – Kentucky Business Investment (KBI) Program
    Businesses meeting minimum investment, job creation, and wage and employee benefit requirements may be entirely exempt from corporate income or limited liability entity taxes for up to 15 years and retain up to 5% of the gross wages of its employees whose jobs are created.

Loans

  • Federal – SBAExpress Loan Guarantee Program
    The SBA provides up to a 50% loan guarantee to experienced, private lenders (mostly banks) offering loans of up to $1 million.
  • Kentucky – Micro-Enterprise Loan Program
    Up to a $50,000 business loan plus technical assistance to entrepreneurs starting or expanding a business in one of 26 rural Kentucky counties.

Venture Capital

  • Federal– Small Business Investment Company (SBIC) Program
    Capital provided to qualifying small businesses by privately-owned and managed investment funds. Organizations that participate in the program are licensed and regulated by the SBA and there are a variety of qualifying organizations in Kentucky.
  • Kentucky – Kentucky Investment Fund Act (KIFA)
    A 40% individual or corporate income tax credit provided to those who invest in approved investment funds supporting Kentucky small businesses

 

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