AT&T Capital Corp., a major force in the small-business lending market, has turned the spotlight on a fast-growing niche: franchising. Entrepreneurs who start a Dunkin' Donuts or Baskin Robbins store have many of the same financial needs as those getting into any new business, the AT&T Corp. unit's reasoning goes. AT&T Capital wants to be there with term loans, equipment leases, and other financial products. In the past year, AT&T Capital has directed more than 5,000 mailings toward franchisees. Many had previously gotten loans from AT&T Capital. "It's a large market with significant growth and a need for multiple products," said Robert C. Neagle, senior vice president. AT&T Capital's effort to tap the franchise market is helping to seal its innovative reputation in small-business lending. Less than 10% of small-business owners with sales between $500,000 and $10 million use finance companies. But in the last year Morristown, N.J.- based AT&T Capital has become the third-largest finance company in small- business lending, trailing General Motors Acceptance Corp. and GE Capital, according to Payment Systems Inc., a Tampa-based research firm. AT&T Capital was viewed as a competitive threat by 27% of small-business banks surveyed by Consumer Bankers Association last year. "AT&T and GE Capital and other finance companies have diversified even more quickly than the big banks," said Mary Beth Sullivan, managing director of Furash & Co. "Bankers are saying, 'Good grief, look who got the business this week-it wasn't us, it was AT&T.'" One of 12 U.S. businesses is a franchise, and the numbers are growing by 10% to 12% a year, according to the International Franchise Association. With consumers looking for brand names in such areas as hotels, fast- food restaurants, lawn care, and cleaning services, entrepreneurs often find a franchise to be less risky than starting a business from scratch. Only 3% of franchise units close their doors within six years of operation, compared to 60% of other small businesses, according to the franchise association. Lower risk means more stability for the lender. The franchise trade association estimated that by 2000 half of all retail sales, or $1 trillion, would be made by franchises. AT&T Capital is also working to become more effective at marketing to these enterprises. Last year, the finance company sent a mass-mailing to small-business owners of various stripes. Recipients tended to throw the letters away. When telemarketers called to follow up, the owners typically said, "No thank you. We already have long-distance telephone service." Such responses helped AT&T realize it needed to hone its marketing and target the franchising niche, Mr. Neagle said. "It does confuse them when they think your solicitation has to do with the long-distance wars and not with financing, so we had to find ways to get around that," he said. Now AT&T sends much more targeted mailings designed to overcome the difficulty of timing when a business owner has a need for a specific type of financing. For example, when Dunkin' Donuts stores wanted to begin selling bagels, AT&T Capital sent offers for equipment financing to franchise owners who would need to buy bagel-making equipment. AT&T also tailors its offerings for specific industry segments, such as casual dining, fast-food, and snack food. What's more, the company developed a brand name, Franchise One, to help promote its offering. It deemphasizes the AT&T logo and name in mailings. Franchise One is a division that offers Small Business Administration loans, equipment leasing, commercial mortgages, and term loans. That's a far cry from 1985 when AT&T Capital was formed to finance the purchase of telephone equipment. AT&T first acquired an inventory finance company, then a small-ticket leasing firm, and in 1991 an SBA lending license. Since then, AT&T has grown into the second-largest SBA lender, making 924 loans last year through the 7(a) program, totaling $263 million. Only the Money Store was bigger. AT&T generates sales with a 60-person sales force through a network of vendors, franchise associations, and accountants and lawyers who work directly with small-business owners. AT&T has become even more competitive this year, said Terry Spiro, chief executive officer of $88 million-asset Tyson's National Bank, McLean, Va. "They are offering terms, structure, and pricing that we choose not to compete with," she said. Barry Silver, managing director of National Cooperative Bank, another competitor of AT&T Capital, said the finance giant can offer lower rates because it securitizes its loans. Securitization allows lenders to sell their loans to raise money for new lending and to generate fee income from servicing without risking additional capital. Most smaller banks don't have such access to the capital markets or the understanding of securitization they would need to compete on pricing, Mr. Silver said. Rather than fighting, Tyson's National Bank cooperated with AT&T to structure a deal for a customer needing costly equipment. The bank handles accounts receivable financing and a term loan, and AT&T handles the equipment leases. "It appears the customer will be the winner," Ms. Spiro said. "But doing it that way takes time and trouble and careful thought on all sides." But for AT&T, moving into traditional banking strongholds such as SBA lending brought a new set of challenges. The company is forced to rely on a government agency that ran out of money and capped the size of loans this year and in 1995. "It would be our preference to know that there weren't going to be snags," Mr. Neagle said. "But we have to assume there will be bumps in the road." That often leads to difficulties explaining loan delays to customers who need money and don't understand how the government works. "You have customers that think they will be opening their business in six months, and because of the cap they might not be able to do it as they planned," he said. Despite the difficulties, Mr. Neagle said, he wants to continue working with the SBA. He also wants to collaborate with banks that are not experienced in SBA lending or leasing. They could offer AT&T's products to their customers. Although many banks active in SBA lending view AT&T Capital as a prime competitor, Mr. Neagle suggested that banks would do well to refer customers to AT&T Capital for small-ticket leasing or other services that the bank doesn't offer. "Be open-minded about the possibility of working with us," he said. "We're not a bank, so we're not a threat to a bank's core products."

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