Long before the recent credit crunch, financial mavens were predicting that it was only a matter of time before people began creating new mechanisms that permitted small companies to borrow directly from pools of private investors. After all, it was old hat to sell bundles of home mortgages and credit-card receivables to the market. So why couldn't you do the same thing with small-business loans?

Well, it seems that such a market -- at least, the short-term end of it -- is finally emerging. Last November Target Income Fund, of Glendora, Calif., began assembling what may be the first publicly traded portfolio of small-business accounts-receivable loans. Within two months the fund (structured as a closed-end mutual fund) held $1.1 million in loans to 15 companies. And the founders are talking about holding upwards of $10 million by the end of 1993.

For businesses needing working capital, borrowing from Target Income is similar to borrowing from any asset-based lender. To limit the level of risk, for instance, the fund's servicing agents weigh a long list of business data and ratios (debt to equity, net worth, and so on) and look for collateral of about $2 worth of assets for every $1 lent. Among the businesses that have passed muster: computer manufacturers, a temporary-employment agency, a medical-supply business, and a garment maker. (Currently, all the companies borrowing from Target Income are located either on the West Coast or in Texas, although there are no formal geographic restrictions.)

Most borrowers pay around five points over the prime rate to finance receivables for up to 90 days, notes vice-president Eric Banhazl. But if that sounds pricey (which it is for companies that have other borrowing sources), a key differentiator for the fund is the size of the loan it's willing to do. "Unlike most banks or other lenders," Banhazl says, "we'll lend as little as $50,000."

Target Income's goal is to pay investors two to three points over prime. That's at least two points higher than they can earn on other types of short-term investments (and competitive with long-term rates, without the built-in risk to principal). Many -- like Reid Rutherford, CEO of Concord Growth, a commercial finance company that screens and services loans for the fund -- think rates in this area will grow more competitive over the next few years as more loan packagers enter the market. But for now, he says, "small companies that can't find money elsewhere are willing to pay a lot for access to money." -- Bruce G. Posner

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Companies looking to learn more about borrowing from Target Income can call Concord Growth, in Palo Alto, Calif., at 800-229-9000. For information about investing, call Finance 500 at 714-730-9087.

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