When it comes to business financing, a traditional bank loan or line of credit, “You should 100 percent of the time, start with your bank,” says James Key-Wallace, executive director of the N.H. Business Finance Authority.
And that is coming from someone who spent much of his career working for bank alternatives like the Community Loan Fund, Business Finance Authority and regional economic development corporations.
But many new or existing ventures don’t qualify for bank loans, so alternative financing is essential to economic growth and job creation. New Hampshire has a well-developed ecosystem of alternative finance organizations and a robust network of venture capital firms.
Business lending operates on a spectrum of risk and reward, according to Key-Wallace. At one end of the spectrum, there’s the low-risk, low-reward bucket. That belongs to the banks. “They don’t take on a lot of risk, and they charge the least amount of interest,” he says. “There are differences among banks, but it’s more or less the same set of products.”
At the other end of the spectrum are the folks who take a lot more risk and expect much more in return, like venture capital firms and angel investors. While a bank wants to see a track record and documentation related to past performance, an investor is “looking 100 percent to the future,” says Key-Wallace.
“They don’t get paid right away. They get paid later when the business is much bigger and when things go well. If things go well, everyone makes a lot of money, but when things don’t go well, they lose everything.”
While a bank loan comes with few strings attached, venture capital comes with an expectation of equity. The investors want to own a part of the business, become a partner, and help advise.
“The relationship is very different than with a bank, depending on who the investor is,” says Key-Wallace, “but on a high level, it’s a much more engaged relationship with a different set of expectations. Most new startups don’t work out, so venture capital companies need to make a lot on the ones that do. They look for opportunities that have particularly high growth potential.”
In the middle of the spectrum are those businesses or entrepreneurs who don’t check all of the boxes for the banks and aren’t attractive to outside investors, yet still have potential for profitability and job creation.
That’s when businesses need what Key-Wallace calls mezzanine financing. “It’s between the two extremes — medium risk, medium cost — and the debt is more expensive,” he says. “The lenders ride the ups and downs with you. It’s a little more engaged than a bank, but not sitting on a board and making decisions. It’s a hybrid world.”
That’s where places like the Community Loan Fund and the 10 regional development corporations come into play.
“Our mission is to make sure that capital is flowing throughout the New Hampshire economy in all areas,” says Key-Wallace. “If there is a business that should qualify for financing, but for some weird technical reason they don’t, we can help them get it by working through our banks.”
The regional development corporations, which borrow money from the BFA, act as direct lenders, as does the Community Loan Fund. “We seek to target business that can’t obtain some or all of their financing from traditional sources—startups, young companies not ready for banks. They’ll come to us first, get initial loans, grow and then they’re ready to go to a bank,” says Laurel Adams, president of the Regional Economic Development Center of Southern NH (REDC), headquartered in Raymond.
The gap lenders
The REDC, like the Community Loan Fund, is what’s known as a gap lender. “We try to fill in the gaps that traditional lenders can’t. You have to be turned down by a bank, or a bank has to request our assistance,” says Adams.
The BFA gets its money from the fees it charges banks to guarantee loans; the Community Loan Fund’s lending pool is predominantly funded through private investment, while educational programs are funded by donations. The regional economic development corporations are funded by what Adams calls “an alphabet soup of federal agencies,” including the SBA, USDA, EPA and HUD.
While the BFA will consider any legal business as long as it’s creating jobs and can pay back the loan, the community loan fund and regional development corporations focus on certain areas of economic activity.
“Right now, we are focused on helping first-generation immigrants start and grow their businesses with our New American Loan fund,” says Adams. “That helps foreign-born immigrants and refugees. They have some unique challenges with the traditional lending market, like language, culture, net worth and credit scores.”
The goal is for the borrower to eventually meet banking standards. “Within 24 to 36 months of receiving a loan from us, the business is usually able to pay it off or refinance with a traditional lending institution and get a better rate,” says Adams.
The regional economic development corporations are also a good source of business advice. “The majority of people who come through our doors don’t get loans with us,” says Adams. “They might get matched with a bank or they may just need to kick around an idea. Part of the work we do is helping people decide if they really want to open a business, and all of that is free of charge.”
The REDC is in touch with new borrowers on a regular basis, offering free marketing assistance, website development, logo design, financial analysis and even QuickBooks training.
While the regional economic development corporations are focused broadly on job creation and under-served populations, the Community Loan Fund, based in Concord, has specific targets for its programs, including manufactured housing and resident-owned communities. Other areas targeted by the fund are healthy local food systems, solar energy, multi-family housing, nonprofit community services and childcare centers.
For years, the Community Loan Fund operated its own version of a venture capital fund known as Vested for Growth. The organization hired a new CEO in April and is re-evaluating that program.
“The business finance landscape has changed pretty drastically over the last couple years, and we are taking some time to look at those changes and reevaluate how we can best serve the job-creating small businesses that have always been our focus,” according to Steve Varnum, director of communications and marketing for the Community Loan Fund. “We continue to offer loans in manufacturing, retail, farm and food, solar and other businesses.”
Lots of liquidity
According to both Key-Wallace and Adams, the big change in the lending landscape has mostly been the infusion of federal money through various COVID-19 economic stimulus programs.
“There’s so much liquidity in the system right now,” says Key-Wallace. “Banks have a lot of money to lend and are aggressively pursuing clients who have the ability to pay.”
Adams has seen a similar trend at the REDC. “We’ve had a lot more capital injected, as has the BFA,” she says. “It has enhanced our ability to lend. We did a lot of emergency loans and grants, more than 100 over the course of the pandemic so far, which is obviously work we don’t ordinarily do, but it’s to the same type of businesses we’ve been supporting.”