Securing enough operating capital is a common concern for many early-stage tech startups. Developing new hardware or software, after all, is a time-consuming and expensive process. It’s often difficult for small companies to finance their work through revenue alone. A funding source many entrepreneurs overlook: local economic incentives.
Some startups even take on debt or seek venture capital to help get their products off the ground. These are good options, but they may not be available or practical for all businesses. They’re also not the only sources of funding available for high-growth companies. Local economic incentive packages are less known, but equally useful alternatives for fueling growth.
How local economic incentives give startups a lift
As the tech industry continues to grow in size and value, cities and states across the U.S. are increasingly hoping to attract companies that will create high-paying jobs for residents and stimulate the local economy. To entice companies from other regions (and keep homegrown businesses from leaving), many state and local governments offer tax exemptions, grants, and other financial incentives to eligible organizations.
For example, consider the story of SnapShyft, an Indianapolis-based startup whose web and mobile app provides on-demand and short-term staffing solutions for the food and beverage (F&B) and hospitality industries. Looking to add to its team and grow its national footprint, SnapShyft opened a dialogue with the Indiana Economic Development Corporation (IEDC) to see what incentives might be able to receive for its planned expansion.
SnapShyft committed to hiring 40 local employees by 2020 and investing $433,000 in Indianapolis operations over the next five years. The IEDC ultimately awarded the startup a $450,000 incentives package to help fuel its growth. SnapShyft’s story highlights two kinds of economic incentives your company can seek from your state or local government.
2 types of local economic incentives startups can receive
1. Tax credits
Taxes can be a heavy burden for small businesses operating on thin profit margins. Every dollar paid in taxes is a dollar that could have been reinvested in product development or paid to employees.
Local governments understand this. In fact, they may waive or refund certain fees if companies can show how paying fewer taxes will benefit the community. (Think job creation or investments in other local businesses.) High-growth companies are generally the most attractive candidates for tax credits and exemptions because of their potential to positively impact local economies.
In SnapShyft’s case, the company’s plan to more than quadruple its local staff caught the interest of the IEDC. SnapShyft received $300,000 in conditional payroll tax credits, which will help the startup build its team while lessening its tax burden for hiring new employees.
2. Training grants
Finding and retaining skilled talent has become a pervasive problem for the tech sector. The number of available tech jobs is rising nationally, but there aren’t enough candidates who possess the necessary expertise. This dilemma feeds the skills gap currently troubling the tech industry.
If state and local governments want to keep their innovative tech startups, then they must help close the skills gap. Companies need that talent to grow and thrive. Tech programs at local universities help toward that end, but governments may also offer grants to mitigate the cost of onboarding employees and improve tech skills among the workforce.
To meet its growth plan, SnapShyft must provide training for its new employees wherever their technical skills are lacking. The IEDC granted SnapShyft $150,000 through its Skills Enhancement Fund to help lower the company’s onboarding expenses. That will have the additional benefit of developing skilled tech talent within the Indianapolis community.
How to find and secure local economic incentives for your startup
If you want to discover economic incentive opportunities for your startup, then start by familiarizing yourself with the organizations or branches of your local government responsible for economic development initiatives (like Indiana’s IEDC). Browse their web pages, or reach out contact to learn what incentives they’re offering and the terms of eligibility.
The process may be easier if you decide to work with a tax consultant or financial advisory firm, as they tend to be familiar with economic development organizations and can help you negotiate for the best incentives. For instance, SnapShyft enlisted the aid of Indianapolis tax consultant McGuire Sponsel to secure its incentives package.
Whether you pursue them with a firm on your own, local economic incentives can be great funding sources. And just as important, they help you build your business where you want and on your terms.