Alan Hirsch spent three months negotiating a small-business loan from a Baltimore bank to purchase equipment for his start-up restaurant business four years ago.

Then the banker asked for Mr. Hirsch's home as collateral.

Mr. Hirsch ended the discussions and hasn't asked a bank for financing since.

Instead of getting the bank loan, Mr. Hirsch and his business partner, Donna Crivello, went to a local leasing company for restaurant equipment, computers, and software for Donna's Coffee Bar, which sells coffee, pastries, and light fare.

"Bankers say they want to do a small-business loan, but they are really looking for the security of our personal assets," Mr. Hirsch said.

Today, Donna's Coffee has eight cafes and four coffee stands, and has paid down more than 10 leases from Baltimore-based Harbor Leasing Co.

Leasing was once considered a service that small businesses used before they could qualify for bank loans. But that changed as companies with strong brand-name recognition, such as AT&T Business Credit, lured customers from banks.

The percentage of small businesses using leasing companies climbed from 19% in 1990 to 25% in 1996, according to a 1996 survey conducted for American Banker by Payment Systems Inc.

Donna's Coffee is one of a growing number of businesses that lease equipment because they aren't satisfied with bank financing or don't want to buy equipment with a limited life span, such as computers or software.

"People pay a higher rate than they would at a bank, but they get a higher level of funding," said Mark Caplan, president of Harbor Leasing.

Mr. Caplan said his company can lease equipment to business owners that banks turn down because they base decisions on the company's cash flow and history rather than collateral.

Interest rates vary widely for leases that are roughly equivalent to 90% of the value of the equipment the small-business owner needs, Mr. Caplan said.

The first lease for Donna's Coffee of $20,000 carried a 16% interest rate, but the company now pays about 12%. Mr. Hirsch said interest expenses are roughly equal to 1% of the company's gross annual revenue.

Mr. Hirsch said working with a leasing company is similar to building a relationship with a bank, and he appreciates that the company is locally owned.

"It helps that the people who run the leasing company can come in and see what is going on with our business," he said.

Although Donna's Coffee would have an easier time qualifying for a bank loan now, Mr. Hirsch said the banks' collateral requirements are still prohibitive.

The company plans to continue leasing equipment, seek equity investors, and could eventually fund about a quarter of their capital needs through bank loans, Mr. Hirsch said.

"We don't have receivables or heavy-duty equipment, and we have assets that the bankers don't want to own," Mr. Hirsch said.

Mr. Caplan said Harbor Leasing leases to medical service companies or law and accounting firms more often than restaurants, which typically have a high failure rate.

But Mr. Caplan said Mr. Hirsch and Ms. Crivello's business experience, credit history, and the firm's profit potential helped him approve the leases.

"Any bank should have been happy to lend to them," Mr. Caplan said.

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