Milwaukee - If you want to know how relentless George Schonath is, just ask the Small Business Administration.

Mr. Schonath, chairman and chief executive of Wisconsin-based Bando McGlocklin Capital Corp., did not give up despite seven years of refusals by the SBA to give his company authority to originate their guaranteed loans. On Aug. 3, the agency relented.

Since being formed in 1979, Bando McGlocklin has racked up impressive growth and profits by making loans that bankers would not touch.

They ranged from commitments that lacked personal guarantees - a staple of traditional banks - to advancing 90% on real-estate-backed loans. He did all that without ever reporting a loan loss.

Now, armed with relatively risk-free SBA-guaranteed loans, Mr. Schonath is branching beyond his Wisconsin roots into other parts of the Midwest. His goal: to be the premier source of small business capital across the region.

"We would like to do what the Money Store [the leading SBA lender nationally! is doing, just in the Midwest," said Mr. Schonath.

Observers say rivals should not underestimate the aggressive Bando McGlocklin or its relentless less chairman.

"They're now going to be able to go in with a beautiful array of services to help these small business borrowers," said Joseph Stieven, senior bank analyst at St. Louis-based Stifel, Nicolaus & Co.

The company was started by well-known sports figures John McGlocklin, who played with the Milwaukee Bucks, and Sal-Bando, who finished his baseball career with the hometown Brewers. For much of its history, the company operated as a Small Business Investment Corp., or SBIC. Its primary product was a loan backed by owner-occupied real estate.

In 1993, Bando McGlocklin restructured, transferring its SBIC to a subsidiary.

The company also created a small business loan unit after the SBA insisted on the move. Mr. Schonath even raised eyebrows by asking the Wisconsin banking commissioner to license the unit after the SBA said the unit also had to be regulated.

It paid off in August, when he finally won the right to offer SBA loans.

"It was a huge project, but now we can do what the banks do," Mr. Schonath said. "We're so close, we might as well do the whole relationship."

As he sees it, small business owners need two kinds of lenders. First, they need a short-term lender to provide working capital to finance inventories and receivables. .

They also need sources of long-term capital for projects ranging from machinery to real estate.

In its early years, Bando McGlocklin found a niche making long-term loans on owner-occupied real estate when banks would not go beyond three-year terms.

But today, heightened competition has caused more banks to be competitive long-term lenders.

More significant for the firm is the fact that banks are requiring businesses to take their long-term package or look elsewhere for short-term financing.

While he has not abandoned the company's trademark real estate lending, Mr. Schonath now offers credit products ranging from lines of credit to equipment loans.

Also, earlier this year Bando McGlocklin started offering tax-exempt financing to small companies in the form of letters of credit. Bando can make these industrial revenue bond, or IRB, financings pay on deals as small as $500,000, compared with the $2 million minimum that he said many bankers are requiring.,

"It's not a matter of cost effectiveness.

"It's a matter of the banks having a bunch of cheap deposits and wanting to lend at prime plus 1% to earn a 3% spread.

They can earn more this way than by doing an IRB with only a 1.5% letter of credit fee," he said.

Expanding into new products is not without risk. Companies that move beyond successful niches could start making costly mistakes. But analysts don't see that happening to Bando McGlocklin.

Mr. Schonath is no stranger to commercial lending, a business he learned during three years with the former Brown Deere Bank just outside Milwaukee. His background also includes a stint as an investment banker at Clarke Dodge a Co., the company that financed Abraham Lincoln's second presidential campaign. (The firm is now part of Kidder, Peabody & Co.)

Perhaps more telling, however, is the fact that the company has never reported a loan loss.

"I think anything Bando [McGlocklin] is trying to do, they are going to do so in exactly the same conservative manner they have used in the past," said Stifel's Mr. Stieven. "I can't imagine George Schonath being reckless at all."

Still, the banks have one competitive advantage: a lower funding cost driven by federally insured deposits. Bando McGlocklin uses a variety of funding sources, ranging from Small Business Administration debentures and Wisconsin Investment Board notes to a bank revolving line of credit.

Even so, the difference is not insurmountable. The company uses interest rate swaps to lower its interest cost.

For instance, the Wisconsin Investment Board notes, totaling over $15.6 million at June 30, have fixed interest rates ranging from 9.05% to to 10.8%..

By swapping the fixed to variable rates, Bando McGlocklin can offer loan rates as low as prime.

The company's cost of funds is also aided by its structure. It does not pay federal income tax because it is registered under the Investment Company Act of 1940.

Not being a bank has other advantages as well.

Without regulators breathing down its neck, the company is able to make a long-term commitment to borrowers, even in tough times.

Mr. Schonath said that difference was recently highlighted by a situation where a bank had a line of credit extended to an established company for which Bando holds a real estate loan. When the customer started suffering losses, the bank decided to call the loan.

We said, you're making a mistake," said Mr. Schonath. "So we ended up taking out the bank by making a $700,000 working capital loan to a company with negative net worth."

The borrower is expected to have a positive net worth in the first quarter of 1995.

Had both lenders liquidated the company through foreclosure, neither would have come out whole. Plus, the small company would have been out of business.

It seems Mr. Schonath is as patient as he is relentless.

Bando Considers Role as Correspondent for Wis. Banks

Just as his company increasingly competes against them, George Schonath says he wants to help Wisconsin's independent banks.

Now, small banks risk losing the entire relationship - including lucrative demand deposits - if they turn to a big-city correspondent lender to help with credit needs too big for the independent, Mr. Schonath's solution: Bando McGlocklin Capital Corp. may enter the correspondent business.

While the idea is still being developed, Mr. Schonath said the plan would have at least two advantages for small banks. First, Bando McGlocklin's wide range of services, ranging from its ability to originate SBA loans to its tax-exempt industrial revenue bond capabilities, would complement a bank's more traditional loans.

The second draw is the company's structure. As a nonbank small business lender, Bando is transaction oriented. the company is looking for loans, not to take away the bank's other business.

"If a company wants to bank with us, they don't have to move their deposits to us," he said.

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