The dynamic landscape of venture capital (VC) demands innovative financial instruments to bolster growth and sustainability. Among these, New Markets Tax Credits (NMTCs) emerge as a powerful resource, providing venture-backed companies with additional liquidity and competitive financing terms. By leveraging NMTCs, startups can secure essential working capital and make strategic capital investments, enhancing their overall growth trajectory.
Understanding NMTCs
Established by the Community Renewal Tax Relief Act of 2000, the NMTC program incentivizes investments in low-income communities by providing tax credits to investors. Administered by the U.S. Department of the Treasury's Community Development Financial Institutions (CDFI) Fund, NMTCs aim to stimulate economic development and job creation. Investors receive a tax credit that’s 39% of the investment, distributed over seven years.
Strategic Benefits for Venture-Backed Companies
- Immediate Capital Infusion: One of the most compelling features of NMTC financing is that all proceeds are advanced on the day of closing. This immediate infusion of capital can be pivotal for venture-backed companies. By integrating NMTCs into a capital stack, venture-backed companies can unlock additional liquidity through tax credit equity. This extra layer of funding can be crucial in bridging the financing gaps necessary to scale operations, invest in infrastructure, or enter new markets supporting ambitious growth plans.
- Flexible Use of Proceeds: Companies can use NMTC proceeds for many needs, from working capital to capital investments. This flexibility allows startups to address immediate operational requirements while planning for long-term growth initiatives.
- Competitive Terms: NMTCs often come with favorable terms, including below-market interest rates, reduced fees and longer amortization periods. These terms can significantly lower the cost of capital for startups, allowing them to allocate resources more effectively towards innovation and expansion.
Integrating NMTCs Into the Capital Stack
For venture-backed companies, the capital stack typically comprises equity, debt and mezzanine financing. NMTCs introduce a hybrid element that can seamlessly fit into this structure. By providing a blend of debt and equity-like benefits, NMTCs enhance the financial flexibility of startups. This integration can also reduce the equity dilution for existing investors, preserving ownership stakes while still accessing necessary capital.
Real-World Impact and Precedents
Numerous startups have already reaped the benefits of NMTCs. For instance, companies in the technology, healthcare and renewable energy sectors have utilized these credits to finance new facilities, expand research and development (R&D) capabilities and increase workforce training. The positive outcomes underscore the potential of NMTCs to act as a catalyst for growth, particularly in sectors that drive innovation and create high-quality jobs.
Let Us Be Your Guide
Cherry Bekaert’s Strategic Financing Services team is committed to helping clients harness NMTCs as a powerful tool for venture capital-backed growth. By integrating NMTCs into financing strategies, startups can unlock transformative opportunities to achieve their business objectives. Cherry Bekaert’s team provides specialized guidance to help businesses effectively leverage these benefits, aligning NMTCs with venture capital initiatives to drive innovation and expansion.
