Lots of small-business borrowers fantasize about what life would be like without having to deal with bankers. Hal Porter Homes, a home builder in the northern California town of Brentwood, is living the fantasy. Last year the $35-million business wanted relief from the high expenses and the operating restrictions imposed by bankers on every new construction loan. Each loan took two to three months to close, says chief operating officer Phil Bates, and the company was on the hook for everything from commitment fees (usually one and a half points) to the bank's legal expenses. The builder found an alternative: a private construction loan pool funded by about 15 local individuals.

The loan pool (which began at $3 million in late 1992 and has since grown to $4 million) was designed to let the individuals invest their money for up to two years and earn interest rates two to three percentage points above the rate that banks charge home builders. Hal Porter (which continues to do some bank borrowing) is happy to pay the premium, Bates says, to compensate for the costs it doesn't have to bear (the points, legal fees, appraisals, and more) and for the freedom it gets. "Rather than shuffling paper," he says, "we can manage the funds so they're always working."

Recently, Hal Porter expanded the size of its loan pool; though the new participants didn't have to commit to any period, they are required to notify the company 90 days before they need to cash out. "I see the pool as a growing part of our financing program," Bates says.

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