Getting to know your competition is easy when they are the size of General Electric Capital Corp. or AT&T. But what if you're up against a 10- person shop specializing in niche financing?

That's what many bankers are facing from lenders like John Fox, president of Baltimore-based Reservoir Capital Corp. Started with just three employees in 1991, the factoring company has grown to 14 employees and today is buying $12 million to $15 million of new assets every month.

Though he is filling a financing void for small businesses, Mr. Fox is not entirely altruistic. "We may be in the intensive care business, but we are certainly not in the hospice business," he pointed out.

Reservoir Capital often works hand in hand with community banks, but it nonetheless provides financing that in the past would have come from bankers. Ed Nazarko, president and founder of Executive Advisers Inc. of Silver Spring, Md., said these "two guys and a PC" shops are examples of how niche lenders are slowly nibbling away at banks' customer base.

"People like Mr. Fox are doing business that has come out of banks," he said. "The reason these guys are getting this business is because banks have gotten more doctrinaire in their approach to lending."

Much of the blame for this dogmatic approach goes to regulators. Because lending against receivables is a high-risk, high-maintenance form of credit, it requires a lot of capital to reserve against losses due to fraud.

In return for their efforts, factors can earn rewards that borrowers find offensive. The typical annualized rate charged in a factoring transaction runs between 30% and 40% over prime, and some contracts can cost as much as prime plus 100%.

This crop of niche lenders is not a new phenomenon, said Leonard Machlis, executive director of the Commercial Finance Association in New York. He said the same type of entrepreneurial spirit helped launch the industry in the 1930s.

He has seen their numbers increasing in recent years, though. Today, the CFA has about 250 members, of which nearly 90 come from companies like Reservoir. And while bank or bank-affiliated members made up 75% of the total membership as recently as the late 1980s, today they make up only 48% because of the influx of independent lenders.

But banks are trying to regain this line of business. Tom Cross, president and chief executive of Triad Financial Inc., watched as banks took three deals in one day from his seven-year-old Bloomfield Hills, Mich.-based factoring company.

A former banker himself, he does not expect the encroachment to last.

"During aggressive times, banks will venture into our marketplace. But they quickly learn their lesson," he said.

That is because some lenders lose track of their collateral, according to Wayne Frederick, president of WFA Collateral Review Services Inc. He has worked with factors and asset-based lenders since 1962 and has seen a lot of former bankers get into the factoring business only to get into trouble.

"A lot of them will get burned along the way because they have not done their homework," he said.

Reservoir's Mr. Fox, however, said he understands the risks involved and carefully monitors the collateral to prevent fraud. He said of the $300 million in assets his company has purchased since 1991, losses have been limited to just $80,000.

With this kind of track record, he is marketing his services to community banks that face losing good customers to the big banks when these clients need to secure financing with inventory and receivables.

"By using Reservoir Capital, the bank retains the client and fee income from that customer," he said.

Small factoring companies are able to finance companies with annual revenues below $20 million by relying on advances in technology. Mr. Fox said his computer system is able to automatically sweep news and credit information from several data bases and match it against each of his customers. If any of the information is negative, the computer tells a company employee.

Without a monopoly on information, banks have lost their competitive edge.

"When you let little niches go away like that, the community bank is left to keep the checking account, and that is not the most profitable business to have," said Mr. Nazarko.

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