A Michigan finance and factoring company - weary of seeing customers seeking financing from banks - has formed its own bank.

Crestmark Bank opened its doors this month as a state-chartered institution focusing exclusively on small-business banking.

"In many instances we are the first financial institution our customers have been able to get dollars from," said W. David Tull, the bank's chairman. "Now these customers will graduate to another form of financing and won't have to leave."

Mr. Tull, a former Michigan National Bank executive, led the move to start a bank along with Thomas Cross, who founded the original firm, Triad Financial Inc., and is Crestmark's president.

Crestmark's move illustrates the blurring of lines between banking and nonbank financing activities in the small-business arena.

Factoring - buying a company's receivables as a form of short-term financing - traditionally has been what a company seeks before it's "bankable."

But that's changing. At the same time that Crestmark is getting into the banking business, community banks and regional banks nationwide are expanding into the factoring business.

"Its a natural shift, with the lines being blurred in the commercial banking," said Michael Moran, a principal and bank analyst for Roney & Co. in Detroit. "A little lower down the food chain or higher up the risk chain, you get into factoring."

Factoring is a financing niche with high profit potential and equally high risks. Banks traditionally have shunned it.

Factoring customers usually have a 40% to 50% annual turnover, as they graduate to cheaper forms of financing. So more companies - banks and nonbanks - are seeking to keep the customer as they make the change.

"They are obviously not prime-rate customers," said Van MacKenzie, president of Conway, MacKenzie & Dunleavy, a Birmingham, Mich., consulting firm for struggling companies that refers clients to Crestmark.

"The type of client (using factoring) isn't necessarily in trouble," Mr. MacKenzie said. "It's more a function of the type and size of the loan, rather than the credit quality."

Mr. Tull said Crestmark got into the banking business because banks can borrow more than finance companies using certificates of deposit, which are much cheaper than selling subordinated notes.

Banks are attracted to the expanding factoring business because of the high profit potential. A 25% annual rate on receivables financing is considered low.

"The profit potential is clearly better than the normal yield on a loan, but there is more risk," said Robert McKay, president of Tampa-based First Commercial Bank. "It's not for everyone."

First Commercial, which lends primarily to small-business owners, entered the factoring business two years ago. Since then, three other Tampa banks have begun factoring.

In a factoring agreement, the lender buys a company's accounts receivable at a discounted price, charges interest on money advanced to the owner, charges fees for the bookkeeping, and collects payments for the bills.

The lender, rather than the small-business owner, assumes the losses on bills that cannot be collected.

Michigan Banking Commissioner Patrick McQueen worries that factoring sidelines, while profitable, might bring trouble to banks that get in over their heads.

"These sorts of companies are the first ones that get hurt on the downside, especially in Michigan, where they are so closely tied to the auto industry," Mr. McQueen said.

"I think there is room for more players," he said "But as regulators, we don't want a bank in that business unless they really know what they are doing."

Serving all of Michigan from a 17-person office in Troy, Mr. Tull said the large regional banks often refer clients with a limited banking history that are in a turnaround situation or in bankruptcy.

"The banks had said, 'We're not going to grab the collateral today, but you have 90 days to find another lender,"' said Stephen M. Gross, a bankruptcy attorney in Bingham Farm, Mich., who refers clients to Crestmark.

Crestmark Bank has no consumer lending department, no checking or savings accounts and no bank tellers. The bank offers a limited range of commercial deposit accounts for balances of more than $50,000 and specializes in lines of credit and commercial loans of less than $1.25 million.

"What is a problem to other banks is an opportunity for us, because the other banks aren't prepared to do the administration necessary to feel comfortable," Mr. Tull said.

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