A six-and-a-half-year-old Massachusetts community bank is blazing a trail in small-business lending.

In just three years of active business lending, Flagship Bank and Trust Co., Worcester, has become one of the top Small Business Administration lenders in the state, surpassing even banking behemoths such as Shawmut National Corp. and Fleet Financial Services.

The SBA recently granted FLagship status as a "preferred lender," its highest level, allowing the bank to authorize small-business loans without waiting for agency approval. Only four other banks in the state and 157 in the nation have such status.

SBA Guarantee Fee

That's not the $250-million-asset bank's sole distinction.

The bank is the only institution in the nation that pays the SBA's 2% guarantee fee on each loan instead of passing it on to loan applicants, according to SBA officials. That has saved applicants thousands of dollars.

"Maybe we are [crazy], but I would rather have a satisfied customer and a loan on the books that has a government guarantee on it and pay the 2% than not have it on at all," said Donald McGowan, president of Flagship.

Eases Application Process

The SBA's district office in Boston reports that FLagship approved 35 loans worth $5.2 million from Oct. 1, 1993 through June 30, 1994. That ranks the bank number three in the state in the number of Small Business Administration loans, behind Bank of Boston, with 75, and Danvers Savings Bank of Danvers, with 36. FLagship is second in the total amount of loans for the fiscal year, with Danvers ahead at $5.9 million.

Last March, FLagship opened an SBA Express Loan Center to facilitate applications. It followed a bank study that determined that potential clients weren't going to banks for SBA loans because of the high fees they would have to pay, the "myriad of governmental forms" they would have to fill out, and the long approval process involved.

But FLagship has been able to attract businesses because it pays the 2% SBA fee on each loan instead of passing it to the customer. It also assists applicants in filling out the forms, and it has eliminated the need for outside consultants to package the loans. That move alone saves businesses $1,500 each time they apply.

"That's a pretty significant sum and many borrowers are scared away because of that fee that they have to pay to get into it," said Mr. McGowan.

Since it started issuing SBA loans in 1991, Flagship has made more than 85 loans totaling more than $20 million. Flagship's average loan is between $150,000 to $200,000.

"The process was fairly smooth. They had everything well organized. So far they have been flawless in handling our account and helping us through the SBA process," said Walter M. Henritze III, president of Wave Inc. of Framingham, who received a $200,000 loan to relocate the company.

Octavio Sanchez-Torres, president of Printing Depot of Worcester, applied in February 1994 for a $30,000 loan to Start that business. Three weeks later, in March, he had his money.

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