To the limit: when Todd Kesselman makes loans to 'risk addicted' entrepreneurs, one of his goals is to prevent them from self-destruction.

Todd Kesselman gets a thrill from watching entrepreurs perform under pressure. Sometimes, though, they crack. That's what he tries to prevent.

Kesselman, a former bankruptcy trustee in Orange County, witnessed firsthand how high-growth businesses that carried large amounts of inventory would sometimes run aground because of problems getting financing from traditional banks.

"I love entrepreneurs and I've seen what happens when they fail," said Kesselman, who founded a small Las Vegas airline and printing firm that went bust in the early 1990s. "Everyone gives lip service to entrepreneurs but most of the structure of the financing system doesn't really work for them."

Recognizing a $2 billion market that had not yet been tapped, he created his own finance company, Inventory Capital Group LLC, in 1997.

The company performs a function similar to that of a factor, a type of lender used by apparel makers to finance the purchase of inventory. These short-term loans are typically tied to the production of one large order, and are repaid when the manufacturer receives payment.

Inventory Capital goes one further by stepping in as the purchaser of inventory on behalf of clients, often fast-growing companies that can't qualify to borrow and purchase the goods themselves. Inventory then sells the goods to its clients, who range from direct marketers to airplane parts manufacturers, at a mark-up.

To ensure that he doesn't get stuck with a pile of merchandise sitting in a warehouse, Kesselman requires the entrepreneur to line up a buyer and obtain a letter of credit from the final customer.

Though the company initially started out small, its revenues were $500,000 in 2003, its share of a $5 million financing portfolio.

Lending background

Kesselman got his first taste of lending as a financial analyst at the old First Interstate Bank, where he set up a system that analyzed the profitability of individual bank branches. He went on to become a bankruptcy trustee, where he navigated companies through bankruptcy court and observed which banks lost money on loans in Chapter 11 estates. That experience, combined with his work at a direct-response company, served as the basis for his inventory financing model.

Kesselman admits he's brutally honest with his clients.

"People would be better served to be told that their idea stinks," he said matter-of-factly.

He also believes banks and collateral lenders focus on the wrong aspects of a company before determining whether to lend. "Credit history is meaningless if the business proposition doesn't support the business," he said.

Inventory Capital typically purchases 100 percent of a client's inventory and charges 1.5 percent interest each week for taking it over. The markup can be stiff, with companies typically financing their inventories over three to six months. Kesselman said he has several "silent partners" who are investors in his company.

The process of getting financing typically begins at a face-to-face interview with Kesselman, who grills entrepreneurs about their business, models, as well as their personalities. "I've learned that if someone says 'yes' to everything, they are either not detailed enough or too desperate," he said.

He admits he's fascinated by the psychological aspects of lending to entrepreneurs, adding that many are "addicted to risk."

"I talk to my clients every day and they know that the first thing they have to do if they have a bad month is to call me," he said.

Companies that need to finance their inventories come in all shapes and sizes.

One of Kesselman's clients, Gall Tilbrook, a direct marketer based in Toronto, created a program for Major League Baseball and the Boston Red Sox that involved selling 2.5 million souvenir pins at retail outlets through a promotion with the Boston Globe. The problem: Tilbrook had less than a week to place orders so that the pins could be made in time. "We had a high-profile partner, but I only had a week to come up with the financing," said Tilbrook.

Inventory Capital funded the deal by purchasing the pins directly through the vendor and then held the inventory under its own name until Tilbrook was able to meet the requirements of delivering the pins to retail outlets.

Kesselman's finance concept was inspired by the business model of direct response companies, which often use immediate payments they receive from customer orders as a way to leverage the costs of doing business.

The company keeps close tabs on the sales process of its clients, so even if they do not have a purchase order in hand, they have the staff to generate the sale.

Kesselman said about a third of his clients are on a "high watch list" in which they need active help in getting rid of their inventory. But he estimates the company has to liquidate the inventory on only about 5 percent of its clients.

Small business owners should analyze their own strengths and weaknesses so they can set up mechanisms to protect themselves from failure, he said.

"To be successful at what I do, I have to keep the entrepreneur from self-destructing."

PROFILE

Inventory Capital Group LLC

Year Founded: 1997

Core Business: Inventory lending

Revenues in 2002: Under $100,000

Revenues in 2003: $500,000

Employees in 2002: 3

Employees in 2003: 5

Goal: To have a lending portfolio of between $250 million and $300 million in the next three years

Driving Force: "I want to rearrange the entrepreneurial landscape. I took five phone calls from factors today who told me that no one else is doing this."