A Milwaukee-based lender is chucking its small-business investment company license after a three-year funding feud with Washington.

Still planning to focus on the small-business niche, Bando McGlocklin Capital Corp. now is trying to organize as a real estate investment trust with a commercial bank subsidiary.

Bando McGlocklin, which currently operates as a small-business investment company under a charter granted by the Small Business Administration, said it plans to switch because it hasn't received the low- cost agency funding to which it is entitled.

"The problem started occurring three to four years ago," said George Schonath, president of Bando McGlocklin. "We started thinking about other ideas and thought an alternative would be a commercial bank."

The dispute reflects differing interpretations of the law governing the loan program.

The SBA maintains that its mission is to support companies that do equity investing - the activity most SBA-backed small-business investment companies prefer. But Mr. Schonath said the agency is also obliged to support lenders such as Bando McGlocklin. It is entitled to $65 million of SBA-backed debentures, he said.

Bando has a portfolio totaling $150 million, mostly in real estate loans, Mr. Schonath said.

"The SBA prefers to work with equity-type investors," Mr. Schonath said.

SBA spokesman Michael Stamler said the agency does accommodate small- business investment companies that lend, if not on the scale desired by Bando McGlocklin.

"Venture capital is the hardest kind of capital there is to get," he said. "What is most needed are patient equity capital investors."

Mr. Stamler said that in the early 1990s the agency retooled its small- business investment company funding process to make it more friendly toward equity investors. Mr. Schonath's complaints date from this time.

But for Bando McGlocklin, the dispute soon will be over. The Wisconsin Office of Commissioner of Banking already has approved its application to open a bank. Mr. Schonath said Bando McGlocklin still needs approval from the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and shareholders.

The new Bando McGlocklin and its banking subsidiary, Investors Bank, will begin operation Jan. 1, Mr. Schonath said.

He declined to discuss specifics of the planned bank or its strategy. But he said it would solicit deposits nationwide and lend the money to small businesses in Wisconsin and the Midwest.

"This isn't going to be a run-of-the-mill bank," Mr. Schonath said. "We see ourselves as doing business as a bank anywhere where we can take deposits."

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