Mellon Bank Corp. believes it has found a better way to serve businesses needing less than $100,000 of seasonal and revolving credit - a way that it says doesn't add unnecessary risk to its balance sheet.

The Pittsburgh-based bank's solution is the Business Builder line of credit. Launched last fall, the product allows businesses to pledge both business and personal assets to secure a credit line to which the borrower can gain access by telephone.

And with a five-year term, the product has won favor among small business owners in the bank's Pennsylvania, Delaware, Maryland, and New Jersey markets.

"Sometimes, I run into situations where I have a lot of out-of-pocket expenses for a job, and I don't get paid for maybe 30 to 40 days," said Rob Whitehead, a Mellon customer and owner of ColourWorks Inc., a Wilmington, Del., commercial photographic lab. "So this credit line is valuable because it helps me get over these hiccups."

Mr. Whitehead used the equity on his home to secure the loan. While other lenders offer similar programs, he said Mellon's line of credit gives him freedom from having to pay down the loan to zero every year - a common feature on traditional home equity loans.

The bank offers this product for companies looking for credit ranging from $10,000 to $100,000. Once the loan is approved, the bank does not require quarterly, or even annual, financial updates as long as payments are current.

In return, the bank requires monthly payments and interest charges beginning at around prime plus 1%. This compares with a rate of 2% over prime charged by Mellon for traditional receivables- or inventory-backed lines of credit.

Sergio Ora Jr., a senior vice president and manager in the business banking group of Mellon's Delaware operations, said the bank is able to offer the product by treating the line, after it is granted, as it would a consumer loan. This alleviates the hassle for the borrower as well as costs for the lender.

Mellon developed the product in the fall of 1993 after discussions with a focus group of customers. "They said that the commercial line of credit as traditionally structured was a hassle," Mr. Ora said. "To get away from this, they said, they were willing to put up personal assets."

While the security for home equity loans is considered sound collateral, observers warn that much can change in five years.

"If they offer a credit line for five years and don't ask any questions, they will probably be the last ones to know when problems do develop," said Warren Heller, research director at Veribanc in Boston. "It's awfully hard to see these problems coming."

He warned that such loan structures are susceptible to economic downturns. To head off problems, the analyst suggested that Mellon create a sampling program to keep track of the collateral securing some loans. "It could make sense if they have the machinery to allow them to pay attention to what happens to the collateral," Mr. Heller said.

Mr. Ora conceded that these credit lines could become vulnerable but said Mellon monitors the loans through normal behavioral checks and annual credit reviews that are done without asking the borrower for new financial information.

The product has found eager borrowers in a number of groups, Mr. Ora said. One group is white-collar managers thrown out of work by corporate downsizings who want to use their home equity to fund a venture. The loans have also proven popular among small retail and service businesses that are typically asset-poor.

Perhaps most importantly, the structure gives customers the flexibility they sometimes need. Consider the case of David Greenhaugh, owner of Midway Services, which sells and services outdoor power equipment from its base in tiny Lewis, Del.

By securing a credit with the value of personal properties he owns, Mr. Greenhaugh was able to cut the cost of financing his inventory. It also gave him bargaining power with suppliers.

"Now that I have the money available in a minute's notice, I can say I will purchase this or that amount of equipment if you take another 8% off the price," said Mr. Greenhaugh.

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