Whether you are an entrepreneur launching a new product, adding jobs or equipment, or planning a major expansion, the one constant is that there’s no single “right” way to finance a business. Different sources of capital are designed for different situations. But how does an entrepreneur navigate banks, venture capital, and non-bank lenders? Understanding those differences can save time, money, and frustration.
Below are the major options and a checklist of questions to help you determine which path fits your business.
Bank Loans: Consistent and Affordable
For most NH businesses, a bank loan is the primary source of loan capital. Community and regional banks are deeply embedded in the state’s economy. They succeed when their customers succeed. Bank financing works best for businesses with a
track record (revenues, collateral, and cash flow that can support repayment).
When and Why to Use Bank Loans: Bank loans are well suited for equipment purchases, facility expansions, or working capital. They generally offer the lowest interest rate because banks structure their loans to mitigate as much risk as possible. The trade-off is you must demonstrate a historic ability to repay and meet other underwriting criteria. Banks aren’t your typical go-to for startups, nor for ideas that require future financial projections to be successful.
How to Approach a Bank: Start early. The best relationships are built before you need financing. And loan approvals take time. Meet with a lender to discuss your plans and get feedback on what would make you a strong borrower. Assemble a solid business plan, recent tax returns, financial statements, and realistic projections. Be prepared to explain how the loan will be used and how it will be repaid.
Resources That Expand Bank Lending: Even good businesses sometimes fall short of a bank’s lending criteria. That’s where organizations like the NH Business Finance Authority (BFA) and the U.S. Small Business Administration (SBA) come in.
- The BFA partners with banks to offer loan guarantees, loan participations, and direct loans that reduce a bank’s risk and enable them to say “yes” more often. The NH BFA has supported thousands of NH businesses by helping a bank lend to a good customer who might not otherwise qualify.
- The SBA offers several programs, including its flagship 7(a) and 504 loans, which provide partial government guarantees or long-term fixed-rate financing for fixed assets. These programs can help get a bank’s loan across the finish line and assist the borrower by providing interest rates that are affordable and predictable.
By combining a bank’s lending expertise with these risk-sharing tools, many businesses that might otherwise be turned away can secure the capital they need.
Do This Well:
- Build a relationship with your banker before you need funds
- Present clear, conservative financial projections
- Understand your collateral and be realistic about what you can pledge
- Be prepared to share clear, well-prepared, historic financial statements.
Avoid This:
- Waiting to apply until you need the money now
- Taking out long-term debt for short-term needs. Avoid still being in debt when you need to borrow again
- Signing a loan agreement without fully understanding interest rates, maturities, covenants, or personal guarantees. This is especially true for complex leases and/or online loan providers.
Venture Capital: High Growth, High Expectations
At the other end of the spectrum is venture capital (VC). Instead of lending money to be repaid, VCs invest equity in exchange for a share of your company. This works for companies that can grow rapidly and generate outsized returns. Common examples include software technology, biotech, or other rapidly scalable industries.
When and Why to Use VC: If your business has the potential to grow exponentially in a short period, but needs significant capital to get there, venture capital may be appropriate. It’s particularly relevant if you have proprietary technology, a disruptive model, or a first-mover advantage. One key aspect to VC funding is knowing the exit plan up front. Investors make their money back when you sell the business, and a clear path to that exit is essential. These investors typically want an exit in 5 to 7 years, if not sooner.
How to Approach VC: Identify funds that specialize in your line of business and your stage of growth. Some funds focus on seed stage ideas, while others specialize in companies growing from $10 million to $100 million in revenue. Develop a compelling pitch deck explaining your market, team, competitive advantage, and financial projections. Your projections might not need to show immediate or historic profits like a bank would require. VC funds typically bridge the growth gap before revenue and profits scale massively higher. While you need to be aware of your cash flow dynamics, and how it may affect the need for additional capital down the road, VC funds view this cycle through a different lens. And again, be ready to talk about your exit strategy so investors know how they will recoup their funds.
Do This Well:
- Demonstrate a large, scalable market
- Highlight your team’s expertise and previous execution record
- Understand your business’ valuation and the terms you’re willing to accept
- Seek investors whose values and time horizons align with yours
Avoid This:
- Being unrealistic about your company’s current valuation VCs value your company at the stage you’re at today, not your future potential. Investors get their upside from seeing that potential realized.
- Underestimating how much time fundraising will consume
- Ignoring the cultural fit between investor and entrepreneur. Remember, venture capitalists become partners in your business. You’re not just raising money; you’re choosing co-owners.
Alternative Non-Bank Lenders: Filling the Gaps
Between traditional bank loans and venture capital lies a broad category of alternative, non-bank lenders. These organizations serve businesses that would otherwise qualify for bank financing but have some temporary challenge that needs to be overcome. They often package their loans with valuable business coaching and guidance. And while they can be more flexible than a bank regarding approval conditions, taking on that extra risk comes with slightly higher interest rates.
Examples in NH:
Regional Development Corporations (RDCs) operate throughout the state, offering revolving loan funds, gap financing, and training programs. These nonprofit organizations typically
fill the gap in a transaction to help a larger bank-led transaction move ahead.
The NH Community Loan Fund provides flexible capital to small businesses, resident-owned cooperatives, and many other sectors including nonprofits. They are active statewide and provide more flexible underwriting than banks.
These lenders often coordinate with banks to provide layers of financing, sometimes called a “capital stack,” to get a project fully funded when a conventional approach isn’t sufficient.
When and Why to Use Them: If your business creates community impact, needs smaller amounts of money, or lacks
collateral but has strong cash flow, these lenders may be the
right fit. They’re particularly valuable in rural areas or underserved markets.
How to Approach Them: Identify which organization serves your region or sector. Understand their mission as many require job creation or a benefit to low-income individuals. Be ready to share your story and financial information, just as you would with a bank.
Do This Well:
- Provide evidence you’ll be a reliable borrower despite not fully qualifying for bank financing
- Seek out any technical assistance they offer. It can be as valuable as the loan itself.
- Consider combining their funds with bank financing for a stronger package
Avoid This:
- Assuming alternative means easy. These lenders still require documentation and repayment.
- Failing to take advantage of networking and mentorship opportunities they provide
Questions to Ask Yourself Before You Seek Capital
No matter which path you choose, asking yourself a few key questions will help clarify your needs and narrow your options:
- How much capital do I need, and for what purpose?
- What is my realistic ability to repay?
- Am I prepared to share ownership, and give up some decision making, to a VC?
- How quickly do I need the funds and how long can I wait for approval?
- Do I have the financial records, business plan, and projections lenders or investors will expect?
- What capital will I need in the future? What kind of financial partner best fits my long-term vision?
Taking time to answer these questions before you approach a lender or investor will help you make a stronger case and choose the right kind of capital for your situation.
Financing is not one-size-fits-all. New Hampshire is fortunate to have a rich ecosystem of banks, investors, and mission-driven lenders, as well as state and federal programs like the BFA and SBA to bridge the gaps. By understanding the strengths and trade-offs of each option, and by preparing thoughtfully, you can find the capital that fits your business and keeps you moving forward.
James Key-Wallace is the executive director of the NH Business Finance Authority, which partners with banks and businesses to support economic growth across the state. Learn more at nhbfa.com.
