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Finova: Reaping Riches From Niches

Finance: LENDING


Lending money to corporations is one of the most hotly competitive businesses around. The $600 billion market is dominated by dozens of huge banks and such giant finance companies as GE Capital Corp. One might think there wouldn't be much room for small players.

One would be wrong. Take Finova Group Inc., a small, independent lender from Phoenix, just three years old and with only $5.8 billion in assets. Finova is making a bundle with a classic strategy: It focuses with sharp precision on relatively small loans and highly specialized markets that don't show up on most competitors' radar.

The result: an average 32% annual per-share earnings growth since 1993. "We absolutely love it," says Goldman, Sachs & Co. analyst Robert G. Hottensen of the company's strategy. So do Finova's customers, who gave the company a record $1.8 billion in new business last year.

"DREAM COME TRUE." Finova, whose name is a combination of the words "financial" and "innovators," was spun out of consumer giant Dial Corp. in 1992 and provides medium-size loans of $100,000 to $25 million. Its average loan, $8 million, is much too small for most major lenders. Samuel L. Eichenfield, the company's 58-year-old CEO, estimates that giant GE Capital needs $35 billion worth of new business each year to maintain its 15% historic growth rate. "You can't do that in $5 million chunks," says Eichenfield. "The cost will kill you."

Despite Finova's small-chunk strategy, it has developed expertise in a remarkable variety of sharply segmented lending, everything from vacation time-share financing and inventory factoring to used airplanes and communications finance. Finova basically goes after business too complex for local bankers but too small to attract the giants.

Because Finova can provide many different forms of financing, it does very well with cross-selling. At Polo Towers, a huge time-share complex in Las Vegas, President Stephen J. Cloobeck calls the financial smorgasbord at Finova "a dream come true." In addition to construction loans and loans based on time-share receivables, Finova has backed the development of a mall in the Polo lobby, and it is financing the fixtures and equipment in Polo's newest tower.

Still, Finova admits that on cost of funds, it's at a distinct disadvantage to banks, even though the company's growth has enabled it to triple its revolving credit line to $2.5 billion. That credit line, mostly from European and Japanese banks, is low-cost, but still higher than what banks pay for funds. Not surprisingly, Finova has some innovative ways to keep costs low. It developed a compensation system that gives its sales staff an incentive only to bring in loans that are likely to pass muster. A third of sales staff's compensation is tied to loan volume and profitability, so if a marketer generates a $2 million loan, he receives his compensation incrementally over the life of the loan. If the loan goes bad, he not only stops receiving that compensation, he actually has to regurgitate whatever he has already received. With that kind of motivation, Finova credit officers are able to approve 9 out of every 10 loans they see, as opposed to 1 or 2 in 10 at many banks. With such successful prescreening, the number of credit analysts Finova employs is kept to a minimum.

Not content with the torrid growth rate, Eichenfield has been on an acquisition binge. Last year Finova bought two large financing business--Bell Atlantic Corp.'s $1.8 billion TriCon Capital Corp. for $350 million in cash and Fleet Financial Group Inc.'s $300 million Ambassador Factors. Both added new specialties to Eichenfield's supermarket.

HIGHER PROFILE. Yet there's a good chance Finova could be an acquiree rather than an acquirer. Giant Deutsche Bank just expanded its U.S. corporate finance business by buying part of ITT Corp.'s financial inventory. And Fleet Financial is now back in the business as well. A major purchaser of financial assets himself in the past, Eichenfield is not ruling out the chance that someday Finova will be up for sale. "If earnings continue the way they have, I think it's a possibility," he says. But he adds he's not shopping the company around.

Less welcome attention, however, could come from imitators recognizing the company's success. "As they get to be a larger market entity, they're going to draw a lot more attention," predicts Michael P. Egizio, a credit analyst at Duff & Phelps. "People would be gunning for you more." So far, though, Eichenfield has managed to do a superlative job dodging the bullets.By Nanette Byrnes in Scottsdale, Ariz.

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