A Kentucky bank holding company has founded a venture capital unit for small business.

Trans Financial Inc., which has $1.8 billion of assets, sees a big opportunity among entrepreneurs who want to enlist bankers' expertise and avoid burdening themselves with personal debts, said Sarah M. Waterfill, president of Trans Capital, the new unit.

"With downsizing, a lot of talent is going into the marketplace with a lot of capital that has been built up over the years," said Ms. Waterfill, an 18-year banking veteran. "They're trying to avoid living off their credit cards like a lot of people have done to get businesses off the ground."

There is little doubt that some small businesses are hungry for capital. In a 1995 survey of 434 fast-growing small companies, the accounting firm Coopers & Lybrand found that 8% planned to obtain equity investments this year.

Trans Capital is going after those companies. It will target businesses that have a two- to three-year track record and annual revenues of $10 million or less, Ms. Waterfill said.

Some companies in that category simply would not qualify for bank credit, she said.

"It takes a period of time for a company to generate earnings to allow any sort of return on investment," Ms. Waterfill said. "It's quite possible that a company going through this stage of its life cycle would not be bankable."

She credited the idea to Doug Lester, chairman and chief executive of Trans Financial.

"In the past we've been a very strong entrepreneurial lender," Mr. Lester said. "This is adding another arrow to our quiver."

Trans Financial's timing was good because small-business investment company regulations have been simplified and made more flexible in the past two years - one factor in Mr. Lester's decision.

James Trainor, vice president of the National Association of Small Business Investment Companies, Arlington, Va., said the reforms could encourage other bankers to follow Trans Financial.

"Banks are getting more interested," Mr. Trainor said.

Trans Capital officially was created last month, but it won't open for business until it gets a small business investment company license from the Small Business Administration, Ms. Waterfill said.

That could take until September, but Trans Capital is ready to handle opportunities that come up before that, Ms. Waterfill said.

"There are steps we can use to do business on an interim basis," she said.

The unit will open with $5 million of capital, Ms. Waterfill said. Its average equity investment, usually in the form of preferred stock, is projected to be $300,000, with an upper limit of $500,000.

With the SBA-issued license, the unit could take up to 49.5% ownership in a company, she said.

The bank plans to be flexible in terms of repayment.

"It's not uncommon for equity investors not to get any cash return for a year, 18 months, two years," Ms. Waterfill said. "The payment of dividends and the redemption of preferred stock are negotiated according to what makes sense for the company and the bank."

Once it opens, the unit will do business in the bank's Kentucky and Tennessee markets, then move on to North Carolina where Trans Financial recently bought a mortgage company, Ms. Waterfill said.

"As the company expands, our goal is to offer service wherever the bank is," she said. Ultimately, the unit might invest in states where Trans Financial doesn't have a presence.

"We really haven't discussed that yet, but we don't want to rule it out," she said. "Initially we'll operate in our primary markets and then in additional markets as we grow. Who knows what the future holds?"

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