Companies that court the business borrower may become more of a force for banks to contend with.

Associates First Capital, Heller Financial, and others are tapping Wall Street and the securitization market for growth capital to build their equipment lending and leasing businesses, a new study by BT Alex. Brown says.

The positioning could make these companies stronger competitors to banks that have long used commercial financing as a bread-and-butter business, said the report's author, Mark C. Albert.

"Commercial banks, by virtue of their deposit-gathering powers, have funding and leverage advantages over commercial finance companies," Mr. Albert said.

But "commercial finance companies are largely unregulated and can provide financing solutions that would never pass the scrutiny of bank examiners."

Finance companies also tend to gain long-term clients that banks shed when times get tough, he said.

Mr. Albert is not alone in his assessment. Chase Manhattan Corp. and Citigroup may not be significantly affected by this stronger group, said Gerald Lewis, an associate analyst with Stephens Inc., but regional banks will probably be hurt as these companies bulk up through public offerings and leverage their lending abilities by securitizing loans.

Investors have been attracted to commercial finance companies because they are viewed as a "flight-to-quality stock," said E. Reilly Tierney, an analyst with Fox-Pitt Kelton in New York.

These companies do not experience the volatile loss rates that consumer finance companies have, Mr. Tierney said. Many consumer finance companies that relied on securitization have suffered this year, as prepayment rates rose and markets for these securities dried up.

"These stocks are cheaper than bank stocks, and their earnings growth is much better," Mr. Tierney said.

The winning commercial finance companies will "choose endurance over wind sprints," Mr. Albert said.

Unlike subprime consumer lenders that suffered setbacks because of controversial accounting techniques, successful commercial lending companies "will have an established track record of growth and maintain accounting integrity" on their balance sheets and in their income statements, Mr. Albert said. "Recurring sources of income are worth more than 'gain-on-sale' income."

The best companies will use securitization as "a funding source rather than a means to generate profits," Mr. Albert said. "There should be little difference between cash-flow earnings and accounting earnings."

At the same time, "Origination capacity should be balanced with funding capacity," Mr. Albert said.

The companies should also carry limited residual risk, accept the constraints of low leverage, and focus on generating higher returns through efficiency, product cross-sells, and fee income.

The better firms should develop strong distribution channels and innovative solutions that lead to repeat business.

The better competitors also will avoid concentration, exploit business cycles to gain market share in tough times, and have tested business models, Mr. Albert said.

Many analysts point to Finova Group Inc. as one of the best examples of a successful commercial finance company. The Phoenix-based company is "very good at targeting the small-business company that falls under the radar screen of the big banks," Mr. Tierney said.

In addition, Finova is "more sophisticated" than a local or regional bank, Mr. Tierney said, and will tailor a loan to a specific industry.

The company has been successful because it has stayed in the right markets and refused to securitize loans, said chief executive Samuel L. Eichenfield.

Finova has concentrated on gaining market share in small to midsize markets, he said. "We'd rather be No. 1 or No. 2 in a moderate market than No. 5 or 6 in a much larger business," he said.

Finova has also made 11 acquisitions in the past six years and has quadrupled assets, to $9.2 billion.

Some finance companies have successfully combined consumer and commercial divisions and are securitizing loans. American Business Financial Services Inc. of Bala Cynwyd, Pa., securitized $80 million of residential mortgage loans last week.

The market for the company's securitizations remains strong, said chief executive Anthony J. Santilli, because of its low delinquency and loss rates.

Heather Timmons contributed to this report.

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