Opportunity funds: A new source of equity capital for small businesses

John Lewis, Executive Vice President & Chief Administrative Officer for The Harbor Bank of Maryland.

John Lewis, Executive Vice President & Chief Administrative Officer for The Harbor Bank of Maryland.

In 2018, a new incentive for investing in certain designated census tracts was created by the Tax Cuts and Jobs Act. This legislation formally created Opportunity Zones, where qualified equity investments into certain real-estate, equipment and businesses provide meaningful tax incentives to investors. It is estimated that the tax incentive is applicable to over $6 trillion in investible capital that is currently on the sidelines. While many believe that the investments will focus on the real estate and venture capital sectors, we believe that the incentive has the potential to make significant equity capital available to Maryland’s small businesses.

The Harbor Bankshares Corporation is a US Treasury designated Community Development Financial Institution with a 35-year history of providing catalytic capital to small businesses and real estate projects throughout Maryland, Virginia and the District of Columbia. As a seven-time winner of New Markets Tax Credits (a specialized tax incentive to spur job creation and economic development), our work has attracted more than $2 billion in investment into companies and projects that by definition would not have occurred “but for” our investment.

More familiar is the work of our principal subsidiary, The Harbor Bank of Maryland, a Baltimore-based community bank, whose lending across the entirety of greater Baltimore has been recognized 12 times with the Bank Enterprise Award by the US Treasury. Our experience working in Opportunity Zones with small businesses has provided insight to aid you in considering whether Opportunity Funds are relevant sources of growth capital for your business:

Equity vs. Debt
Opportunity Fund investments must be made as equity investments into a corporation or partnership. Most small businesses are familiar with borrowing and the relationship with a lender; however, the nature of equity investment can differ as there is often a deeper level of engagement. Debt has traditional uses for acquiring and developing business assets (such as working capital and real estate). Equity has traditional uses for supporting growth-related activity and providing a balance to the debt loads of companies. Often, small businesses haven’t had access to patient equity to attain the proper balance or meet growth needs.

Opportunity Zones were selected by individual states. The Tax Cuts and Jobs Act intends for the incentive to be a catalyst to investments in underinvested areas across the United States and its territories. You may currently be located in an Opportunity Zone. Additionally, areas where you would like to grow your business may be located in an Opportunity Zone. In fact, areas like the historical central business districts of Baltimore and Silver Spring are both designated Opportunity Zones. Access to capital should always be a consideration in growth plans for your business.

In the coming months as the awareness of Opportunity Zones grows, we hope that the Maryland small business community takes advantage of the opportunity to consider this previously unavailable capital source.

John Lewis has more than 22 years in the financial services industry and serves as the Executive Vice President & Chief Administrative Officer for The Harbor Bank of Maryland. Founded in 1982 The Harbor Bank has seven branch locations, primarily serving the Greater Baltimore Metropolitan, with one branch in Prince George’s County and offers checking, savings, time deposits, credit cards, debit card, commercial real estate, personal, home improvement, automobile and other installment and term loans.

Expanding Opportunities

Expanding Opportunities

This article is featured in the 2018 edition of The Daily Record’s Expanding Opportunites Resource Guide for Small, Minority and Women Businesses. Published in conjunction with the Governor’s Office of Small, Minority & Women Business Affairs, Expanding Opportunities explores diversity, entrepreneurship and innovation in Maryland’s small business community. Read more from Expanding Opportunities on this website or read the digital edition.

To purchase a reprint of this article, contact reprints@thedailyrecord.com.

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