Financing Incentives in Low-Income Communities

Businesses in low-income communities are receiving cheaper, more flexible financing, thanks to a special tax credit program.
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This story appears in the June 2006 issue of Entrepreneur. Subscribe »

Six years after starting out as a one-woman firm in 1997, Deborah Marlor's sales and marketing company was bursting at the seams. Her work force had grown from 12 employees to 32, occupying two separate but equally overcrowded business locations. It was, says Marlor, a business owner's nightmare.

"[It was difficult] managing two sets of employees, trying to ensure that messages were communicated across the company," recalls Marlor, 50, owner of DJM Sales & Marketing Inc. in Garden City, Idaho, a suburb of Boise. "We had a very difficult time managing our growth. We had people working at folding tables. We had used all our space. We had three [employees working] in our conference room and two people in my office."

The writing was on the wall: Until Marlor's firm left its cramped quarters, it would have a difficult time getting a handle on its growth. Her desire for more elbowroom and to consolidate her growing staff into one location led Marlor to an abandoned government office building--Garden City's former city hall. It was to be demolished, and a business park would be built in its place. Situated one block from a main commuting artery into Boise and along a major bus line, it was an ideal location for Marlor's business. "It was a great place for a business park," she observes. "It made a lot of sense for us."

However, raising the necessary capital--$813,000--to purchase a building in the new business park would prove challenging; a traditional commercial loan was out of the question. Then Marlor recalled a funding initiative called the New Markets Tax Credit Program she had heard about through her involvement with the local Women's Business Center and the National Association of Women Business Owners. The program offers financing incentives for businesses located in low-income communities.

The business park sat in an eligible location, so before long, Marlor received financing through the New Markets program. The company moved into the new 6,000-square-foot facility in December 2005. "I never would have been able to [buy] the building had it not been for the program," Marlor says, noting that her interest rate is more than 3 percent lower than the typical commercial mortgage rate. And though her new business property is nearly double the size of both her old operating spaces put together, her monthly loan payment is half the amount she was paying in rent.

While the financial gains are significant, the move also ensures that Marlor's business will not outgrow its office anytime soon. "We can con-tinue to grow," she says. "Our final capacity will be approximately 72 people. It is truly a wonderful opportunity for us."

Low-Cost Capital
The Community Renewal Tax Relief Act of 2000 created the New Markets Tax Credit Program to encourage business development in America's distressed areas. It provides private-sector investors--banks, insurance companies, corporations and individuals--with federal income tax credits in return for new investments in eligible businesses, ranging from startups to real estate development.

Qualifying investments include equity investments in or loans to entrepreneurial businesses and other commercial properties in eligible low-income communities. To receive funding, a business must operate in an area that has been designated a low-income census tract. Among other requirements, at least 50 percent of the business's income must be derived from activity in that low-income community.

Though qualifying areas make up a significant portion of the United States, many companies aren't aware that they may be eligible for these affordable loans or equity investments. "The obvious benefit to the business is that it allows a bank like us, or others that have the tax credits, to provide capital at below-market rates and offer extended maturities--things that traditionally we couldn't do as a bank," says Robert Rendon, community reinvestment director for Zions Bankin Salt Lake City, Utah. Zions Community Investment Corp. is one of 63 Community Development Entities, or CDEs, awarded the tax credits annually; it is also Marlor's lender. "It gives a real advantage to businesses that traditionally could not afford the capital."

For its part, ZCIC has made about $100 million in loans to businesses in qualifying low-income communities, including manufacturing firms, construction companies and even legal practices. Along with startups, the program is attracting established businesses like Marlor's that are willing to relocate for the chance to obtain more favorable financing terms. "I actually have two companies right now [whose] plan is to move their facil-ities because they've outgrown [them], and they're looking to find a place in a [low-income] zone to relocate their businesses," Rendon says.

The program's appeal is understandable. Interest-only loan payments for up to seven years and longer amortization periods than offered by mainstream lenders are two options the New Markets program can offer qualifying businesses. "This is quite a flexible program," says James R. Klein, CEO of the Ohio Community Development Financing Fundin Columbus, a CDE that has used the tax credits to help finance a tea salon and a child-care center. "Our interest rates are usually below commercial rates--our target is to get two percentage points behind commercial rates--and even though these are shorter-term loans that are focused on strengthening a business in the first years of an expansion, we amortize them over a longer period of time. We [can] amortize them out 30 years, so the payments are a little less."

Finding Funds
When pursuing this type of financing, bear in mind that participating CDEs approach their funding missions differently. ZCIC, for instance, has made a conscious effort to directly fund entrepreneurial businesses such as DJM Sales & Marketing. Other CDEs--Impact Sevenin Madison, Wisconsin, for example--focus primarily on large real estate developments, such as business incubators and mixed-use commercial developments. However, Angela Kazmierski, Impact Seven's vice president of business development, can foresee greater emphasis on entrepreneurial businesses in the future. "We have been working as an organization--as [have] others throughout the nation--to see how we can approach [lending] in differ-ent ways so that the average small business can benefit," she says.

Marlor, for one, could not be more supportive of those efforts. "It's a great program for entrepreneurs," she says. "It really is something that can make a difference for a community. We can employ more people than we ever have, so it's really about building an infrastructure and an organization that can continue to grow and provide employment for people. And another great attribute of this program is that it's allowing us to grow."

For more information and to find a CDE in your region, visit

Call In for a Transfer
Ready to pay for purchases, transfer money and get financial alerts on your cell phone? In South Africa, people are already using text messages for a variety of banking activities.

For the most part, options for banking by cell phone in the U.S. are restricted, says James Van Dyke, founder of the Pleasanton, California-based financial service industry research group Javelin Strategy & Research. "You cannot actually [make] transactions, but you can ask to receive a text alert if your bank balance drops precipitously or if you're headed toward having insufficient funds."

American banks and wireless companies are furiously developing additional capabilities, as well as mobile payment products. Motorola recently introduced its first phone with a digital wallet, and Citigroup will soon begin testing a service that will let consumers check balances, pay bills and transfer funds on their cell phones. "It's just a matter of time," says Rich Jeffers of Alpharetta, Georgia-based NetBank. "It's all part of the evolution of on-line banking and technology."

Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.
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