Three years ago, interest rates nearly forced Naval Mehra, president of a $3-million restaurant management company in Potomac, Md., out of business. But today, his company, Hospitality Concepts Inc., is thriving, thanks both to lower interest rates and an organization called the Association for Small Business Advancement (ASBA).

ASBA was founded three years ago on the theory that small businesspeople, by pooling their assets in one bank, can negotiate below-prime interest rates on loans with the same leverage as larger corporations. The idea took off, and today ASBA has 287 member companies that average $2 million in sales.

Collectively, these companies run about $450 million annually through noninterest-bearing demand deposit accounts at First American Bank of Maryland and The National Bank of Washington. Each ASBA member is required to make annual deposits amounting to at least $72,000. There is no individual compensating balance required. The bank codes each account to keep track of the group's total balance and determine how much ASBA money First American can use for short-term profit-making investments. In exchange, the bank gives ASBA members favorable interest rates on loans -- as much as three points below prime.

The base loan rate, which is the same for all members, is determined every month by the amount of "free balance money" (the daily average collected balances, less Federal Reserve requirements and less the cost of maintaining the account) as a percentage of the loans outstanding to ASBA members; the higher the percentage, the lower the rate. Meanwhile, the ability of each company to secure a loan in the first place depends, as always, on its own financial credibility. (In Mehra's case, for example, he was able to refinance 20% loans at 11.5%, 1.5% below prime at that time.)

"It's our opinion that in order to attract a bank, you need at least $40 million," says Charles Hilton, executive director and co-founder of the association. This amount, he explains, ensures a sizable sum of free balance money. "The higher the balances on deposits they have with us, the lower the lending rate," says Jerry Chesser, vice-president and director of marketing at First American. Last year, the bank's official prime rate varied from 10.5% to 13%, but its base ASBA lending rate was only 8.3% to 10.5%. "Once a bank analyzes the situation, they see that it's very profitable," says Hilton.

Chesser agrees. "The advantage to us is that the businesses who join the association will open deposit accounts in our bank. We're penetrating the small business sector to a greater extent than we had been in the past."

It is unlikely that momentum will stop. There is an ASBA affiliate in Seattle, and 29 other groups are being planned.