Mercantile Commercial Capital LLC of Florida, which specializes in Small Business Administration 504 loans, often touts the fact that it is not a bank. But eager for cheap deposits to fund its growth, the privately held lender is applying to become one.

Christopher Hurn, the six-year-old lender's president and chief executive, concedes that with this move he might have to tone down his criticism of banks, but he said little else is likely to change at the Altamonte Springs company, which would retain its name as a division of the proposed Emergent National Bank.

"Am I going to have to moderate my antibank stance? Probably. I can't continue to slam what will be my brethren," Mr. Hurn said. "Will I occasionally have to wear a jacket? Probably. But I don't anticipate having to wear a tie."

Mr. Hurn said he has soft commitments for about $26 million of the $37 million he aims to raise. A private offering is expected to get under way this month.

Ken Thomas, a bank consultant and economist based in Miami, said the early interest from investors is promising. "Right now anything over $25 million is good," he said.

Regulators are likely to look favorably on Mercantile's niche in 504 loans, which are considered "socially desirable" and generally qualify for community development credit, Mr. Thomas said. But how much that would help it get its charter approved likely would depend on how much of its lending volume would be in 504 loans after it became a bank.

With a 504 loan the borrower puts 10% down, a lender finances 50%, and the remaining 40%, guaranteed by the SBA, comes from a certified development company. The development company then sells its portion of the loan on the secondary market.

The 504 loan is specifically for buying, building, or refurbishing fixed assets such as land, buildings, or equipment.

Mike Stamler, an SBA spokesman, said the more popular 7(a) loan program is simpler than the 504 one and can be used for virtually any business purpose. He said the 504 loans make up less than 15% of SBA lending each year.

Mercantile sells most of the loans it originates into the secondary market, relying more heavily on fee income than spreads for its profit. Mr. Hurn said it expects to continue doing so even as a bank.

One thing that would change for Mercantile is access to deposits, which Mr. Hurn said would shave about 200 or 300 basis points from its cost of funds.

Though he was reluctant to be more specific, Mr. Hurn said Mercantile borrows around prime and has four warehouse lines of credit with $31.5 million available.

"We're a very profitable institution now, but when we can utilize deposits to fund our loans versus commercial lines of credit, our cost of funds drops dramatically," he said.

The bank would have about $20 million of assets starting out and Mr. Hurn said he would expect it to break even its first year.

Chet Fenimore, a managing partner at the law firm Hunton & Williams LLP in Austin, said the Mercantile assets would give the bank an advantage over other start-ups. Gathering deposits will not be so easy, he said.

"That's been more of a challenge for all banks, but in particular de novos, is how they are capturing those deposits," Mr. Fenimore said.

Mr. Hurn said Mercantile, which has closed loans in 30 states, has worked with about 125 businesses in the Orlando area to finance the 504 loans and hopes to attract them as banking customers.

He already has a bank headquarters building in Winter Park, Fla., that also would be Emergent's first branch.

The goal is to have five branches within three years, but Mr. Hurn said he expects that by using technology such as remote deposit capture, Emergent would not need a lot of expensive branches.

John Matheny, the director of sales and marketing for the consulting firm Brintech Inc. in Austin, said the strategy may work for business owners who can do most of their banking electronically.

But many retail businesses make daily trips to the bank to get change and make deposits. "The convenience of a location near them is extraordinarily important to those people," he said.

Mr. Hurn, who started Mercantile with Geoff Longstaff, its chairman, said the 504 program had become popular on the West Coast but was little known or used on the East Coast.

Initially their idea of focusing on 504 loans had few believers. "Everybody thought we were out of our minds," Mr. Hurn said. "Usually they would walk away laughing: 'You're going to do one product and it's a government product? You're just asking for failure.' Quite the contrary occurred. We've had tremendous growth."

As of midyear Mercantile's loan volume had increased 12% from a year earlier, with revenue up 10% and profits up 5%, according to Mr. Hurn, who would not disclose specific dollar figures.

Last year Mercantile made Inc.'s list of the fastest-growing privately held companies by revenue growth, ranking 245th out of 500. The magazine pegged its cumulative revenue growth from 2003 through 2006 at 951%.

Mr. Hurn, formerly a commercial lender with GE Capital Corp. and Heller Financial Inc., said he believes more business owners would opt for 504 loans if more were aware of them. He claims that commercial loan officers at banks favor 7(a) loans because they are less work and pay better commissions.

"I know most people want to think of their bank as a trusted adviser, but sometimes a trusted adviser won't always give you the straight scoop, and that's unfortunate," he said.

Mr. Hurn applied for a national bank charter in March, and though he originally aimed to open Emergent by yearend, the opening is more likely to happen next spring. Mr. Hurn said regulators have been so swamped with problem banks that the review process for new ones is taking longer, and they are scrutinizing an unusual model in this case.

"We've got to do some extra explaining, because they're just not used to this kind of a structure," Mr. Hurn said.

Mr. Hurn said becoming a bank is "a natural progression" for Mercantile and that it has the right leadership to make the move work: Mr. Longstaff has been a bank president four times, most recently at First Mercantile National Bank in Orlando, which sold to Regions Financial Corp. in 1998.

Robert Coleman, editor of the Coleman Report, a newsletter for SBA lenders, said Mercantile has thrived because Mr. Hurn is an effective marketer of 504 loans, even posting videos on YouTube.

"If he applies his marketing approach that he has with Mercantile to the bank, he'll be hugely successful," Mr. Coleman said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.