While the old saying “there is no free lunch” still holds water, grant funding may just be as close as you can get to it. Every year federal and state governments allocate billions as grants or interest- free loans to encourage investment and innovation. At the highest-level, funding is tied to the anticipated spend, offered as a fixed amount on a first-come, first serve basis, and stipulate specific criteria and/or timelines.
People are generally aware of grant funding, but more often than not, they associate it primarily with innovative R&D projects. Indeed – R&D is a common avenue, but keep in mind that US R&D grants are primarily issued in the form of tax credits, may have strict application timing requirements, and are always awarded after project completion.
There are some examples of direct, cash-based R&D funding, but they are very specific to smaller firms and highly specialized, clean-tech, or healthcare-related R&D. R&D tax incentives are considered widely effective in promoting innovation, but what you may not be aware of is that they can work well in concert with other funding methodologies.
The scope of grant funding available today to producers (and vendors) to support and encourage investment across different business initiatives is considerable. Ayming1 estimates up to 6,000 funding sources are in play today. These types of awards typically require advance approval within specific timeframes, are paid as cash offsets post project, and can amount to a substantial sum depending on the project. Funding comes from federal, state or non-profit organizations focused on promoting various manufacturing initiatives.
We’ll take a look at the common project categories that qualify, in general what they offer, and how you can go about applying for grant opportunities.
GRANT FUNDING CATEGORIES
Grant amounts and requirements are targeted to address specific investment categories. As a rule of thumb, grants fall into one of six “categories”: business growth, facility modifications & capital purchases, green technologies, hiring, and training – and of course the R&D mentioned earlier. Some grants are available on an ongoing basis, e.g., they are always accepting applications. However, others are single events seeking to accomplish a specific project objective.
Government grants are offered by federal or state/local agencies. Unsurprisingly, Federal programs tend to be driven by overarching policy objectives, whereas state/local grants tend to be geo-centric in their objectives. For example, federal programs may target broad societal impact such as technology adoption, sustainability, or global competitiveness whereas state programs seek to invoke more localized investments.
While amounts will vary based on the specifics of any application, the most lucrative funding is typically associated with big-ticket expenditures, such as facility modifications, capital purchases, or green technologies. At the other side of the spectrum are training and hiring grants, which tend to be state and locally funded, are typically smaller, and funding availability varies significantly by jurisdiction.
Massachusetts currently leads the nation in outright training grants, both in terms of availability and funding per head, but few others are as aggressive. It should be noted however, that grants for new equipment, facilities or green processes may also open opportunities for incremental training and hiring funds. Grants targeting business growth primarily focus on tradeshow activity, market intelligence generation, and increased competitiveness. These grants fall into the middle ground and are predominantly geo-centric in their criteria (often state-oriented). Their objectives tend to emphasize an increase in the reach and scope of business activities with an eye for improving a regions overall business climate and competitive posture.
When considering grants as a part of your operations, keep in mind that while R&D tax credits can be sought well after the project has been completed, other funding programs typically require application and approval prior to project start. Nonetheless, the return on investment (ROI) these grants provide for projects can range between 10% and 50% – with 20-25% reflecting the median ROI. Shorter duration projects will receive grants upon completion, but in multi-year scenarios funds can be issued on an annual or semi-annual basis to offset project expenses.
Grant applications require a comprehensive accounting of both financial and technical details. In the financial component, a detailed breakdown of expenses and associated requested funding is required. Keep in mind that approved funding is almost always calculated as a percentage of total project costs and paid relative to expenses incurred.
This can result in less than the requested absolute amount if project expenses underrun your estimates – however don’t count on the reverse as funding is usually capped. A common issue for firms that overestimate project costs is a mad scramble to identify allowable expense invoices in order to maximize committed funding.
Another common question is how long the application process takes. Unfortunately, there is no single answer. However, as the amount requested increases, so does both scrutiny and timelines. If you’re going for major funding, don’t be surprised if the application process becomes elongated.
When selected, a formal binding contract will be executed with the sponsoring organization. Of course, project reporting is required – but timing and frequency are aligned to overall project duration. Project results, status, related invoices and other supporting documentation are required to demonstrate accountability.
Next, we’ll look at the characteristics of each funding category to get a better idea of what to expect.
R&D Tax Credit
R&D Tax credits is perhaps one of the most common and well-defined programs available today. The overall goal here is to improve business’ competitive standing by using federal and state tax revenues to subsidize investments in new or improved products or technical employment opportunities.
The US R&D Tax Credit program was established as part of the Economic Recovery Act of 1981 and was recently made a permanent part of the Tax Code. The program defines research and development broadly – emphasizing evolutionary versus revolutionary progress. A key aspect in the current code is expanded eligibility for related supplies and expenses.
Eligibility is determined based on activities that target the design, development or improvement of new or existing:
- Software or
- Specific techniques
But in addition to that criterion, activities focused on improving functionality, performance, reliability or quality of the business are considered as well – so there’s obviously a lot of leeway. Each application must pass a 4-part litmus test:
- Is this a new or improved business “component”?
- Does it help to eliminate “uncertainty” in the product or process?
- Is the process of experimentation part of the project?
- Are scientific principles applied to derive the outcomes?
If approved, eligible expenses for reimbursement include (US-only) direct labor wages, supervisory and support staff wages, contractor costs, materials, supplies – and more recently – cloud computing development expenses. Software development is also an eligible expense – that embraces many aspects of typical software production, including design, development, interfaces, integration, overall architecture, and testing/QA activity.
Two methods can be used to calculate the amount of the credit. The traditional calculation is straight forward – it can equal up to 20% of the “base” amount, which is calculated as a fixed percentage of the annual top line revenue for the same period.
Additionally, there is now an Alternative Simplified Credit (ASC) that can be employed. Sum the prior three years of R&D expense and divide it by 2, then subtract from the current years R&D expense. 14% of the (positive) can be claimed. It is also important to note that you can claim the current tax year and 3 years back. The credits can be carried forward for up to 20 years!
Capital outlays (which includes facility modifications) are the next largest in terms of dollars and most frequent source of government grant money available to businesses today. One of the largest differences between tax credits and grants is the timing of funds.
Essentially tax credits “look backward” – meaning you must spend the money before you can apply for the credits. All other forms of grants “look forward.” This means applications must be submitted (and approved) prior to actually undertaking the project and incurring the associated expense. Great news for cash flows, but a bit more restrictive from a timing perspective than tax credits which have a wider window to recoup.
Eligible expenses in this category are quite extensive. They include modifications to infrastructure, machines, production capacity, productivity, and efficiency (including energy efficiency). Innovations that result in new (or retrofits of existing) technologies qualify, as well initiatives designed to increase exports.
According to Ayming, an independent organization that matches grant opportunities and recipients, the greatest emphasis tends to be the food, agriculture, and CPG industries.
In terms of dollar amounts, Capital expenditures represent one of the biggest potential payouts – both in pure dollars paid out, as well as availability. But don’t expect dollar for dollar reimbursement. Grants typically offer to cover anywhere from 5% to 25% of expected expenditures.
Occasionally, special high-risk circumstances that may result in significant potential public impact qualify for cost-sharing grants. These can be up to 50% of project costs, but they are carefully selected and must meet stringent eligibility and accountability guidelines. While reporting and accountability requirements vary, they is always a component of the contractual relationship. Company size is also a criterion, as most programs are geared to firms with a minimum of 10-15 employees as part of the eligibility criteria.
While the majority of funding is federally sourced, state and local jurisdictions may also offer programs. In some cases, federal grants may be stackable with state and local grants, but this is evaluated strictly on a case-by-case basis. Given the broad nature of eligibility and potentially large payments involved, capital investment and facility improvements are among the most utilized grants today.
While capital improvement grants have promoted and rewarded energy efficiency, it should be no surprise that “green initiatives” are getting their own set -asides. Funding for these programs have risen dramatically and are a bit more specific in terms of eligible expenses.
These grants target initiatives designed to reduce overall energy consumption throughout a variety of commercial spaces in addition to industrial spaces. It includes agricultural operations, institutional buildings, offices, retail and grocery stores, restaurants, hotels, warehouses, and even multi-family housing units such as apartments and condominiums.
Eligible projects can include lighting and controls retrofits, HVAC redesigns, chiller replacements, variable speed drives, and thermal performance improvements, as well as implementation of new operating procedures and low carbon emission projects. Funding ranges are similar to Capital expenses; from 5-25% on average. Incentives are often based on annual energy savings – and in some cases may be “uncapped” in terms of total outlay.
Business growth grants tend to focus on stimulating trade – i.e., these are often state or local programs designed to boost commerce. They commonly target international trade conferences, networking functions, and regional conferences that promote commercial activities such as exports/trade, or help to drive innovation, competitiveness, and productivity.
Other potential activities that may qualify are innovative market intelligence or technology initiatives designed to drive trade. In some cases, eligibility may require a minimum number of years in business, and/or include a track record of conducting international commerce. Generally, grants from this category may offer up to 20% in incentives, which can represent a substantial expense defrayment for firms whose go-to-market strategy relies heavily on such activities.
Hiring and Training
The most straightforward of the grant categories, training and hiring incentives, are almost always geo-centric in nature; meaning they vary greatly by state or local jurisdiction. Massachusetts maintains one of the most comprehensive and well-funded hiring and training incentive programs in the U.S., but these programs evolve constantly, state-by-state, to meet current demand.
In general, hiring incentives target underserved populations that face significant barriers to employment, such as veterans, minorities, or the disabled, as well as the under-30 demographic for STEM (Science, Technology, Engineering, and Math) related positions. Some programs encourage hiring of apprentices or university students for R&D efforts, or even summer employment.
On the training front, grant programs embrace both new and existing employees with a primary focus on adoption of new technologies, processes, or procedures. Eligibility is typically centered on enhancing work skills or career development goals. From a funding perspective these will appear as non-repayable wage subsidies, 50/50 training cost splits (usually capped) or even as tax credits.
There are a few key things to consider if obtaining grants is on your radar. Start by doing your homework to identify the array of programs relevant to your company. Sources such as Grants.gov, SBA.gov (small business administration), and even regional chambers of commerce are good sources to not only educate yourself but investigate available funding opportunities.
Searches can also reveal local and regional grant programs that focus on specific industries, such as manufacturing or tourism. There are numerous for-profit and non-profit organizations that provide varying degrees of information and assistance.
Keep in mind that while R&D tax credits focus on past expenditures, all other grants require you to apply (and be approved) prior to actually incurring the expense. The process of searching, identifying applicable programs, preparing the submission, and record keeping can be a daunting task.
Organizations that lack the time or resources to dedicate may find it worthwhile to employ fee-based consultants to outsource a majority of this activity. Some, such as Ayming, will work on a contingency basis – taking a small percentage of the grant only if awarded. These organizations not only offer experienced “arms and legs” to help drive the process, they may employee sophisticated databases and AI technology to better correlate your needs with available funding opportunities.
Whether you take a “DIY” approach, or employ outside help, grant programs offer an opportunity to reduce the associated financial risk of socially desirable innovation and investment.