Bucking The System

Stellar Candidates

So what kinds of companies should seek financing from SBICs or SSBICs? Generally, says Zelmanovitch, they should be companies with cash flow that can support monthly interest payments and pay off a loan. This tends to eliminate raw start-ups, companies conducting basic research, and businesses with a new product or service that is untested in the marketplace.

While the words "venture capital" in Freshstart's name imply a less risk-averse profile, Zelmanovitch, like all financiers, is loath to lose money outright, especially when his firm is on the hook for the funds it borrows.

But don't despair. SBA-licensed investment companies generally have much more verve than banks. The reason, according to Zelmanovitch, is they tend to specialize in a certain type of business or industry. "By doing so, firms such as ours recognize and assign value to collateral that a bank would not," says Zelmanovitch.

Coriolan, for instance, approached Chase Manhattan, Citibank and a credit union for a $350,000 loan package to buy additional equipment plus the building his auto center was in, and was rejected by each.

But Zelmanovitch approved Coriolan's $197,000 loan because he readily accepted a second position on Coriolan's taxicab medallions (an emblem that is affixed to the hood of the cab signifying its license) as collateral, even though Coriolan had almost no personal assets. "Banks generally would not consider medallions as collateral," Zelmanovitch says, "but because we specialize in financing taxicabs, I understand their value and can back a loan with them." Why? If the loan went permanently south, Zelmanovitch could take possession of the medallions and, because of his knowledge of this business, easily get them resold at market prices to pay off the loan.

The ability to resell an asset at or near its market price is one of the key factors that sets SBA investment companies apart from other lenders. For instance, when liquidating a borrower's assets, commercial banks use a fire sale approach to move inventory, equipment or real estate at rock-bottom prices. As a result, when a bank looks to collateralize a loan, it recognizes perhaps only a fraction of an asset's true value.

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This article was originally published in the June 1998 print edition of Entrepreneur with the headline: Bucking The System.

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