Like many small-company senior executives, Burton T. Fried had suffered the frustrations of dealing with the lending policies of commercial banks. He had, at times, felt swamped by the paperwork, the time it took to negotiate a new loan, and the high cost of hiring lawyers to read every word of a 100-page loan agreement. Occasionally, Fried would notice the tombstone advertisements in the financial press, jealously noting how such blue-chip companies as IBM Corp. and American Telephone & Telegraph Co. were able to sell corporate IOUs to institutional investors at rates far below what the banks charged his company.

But Fried knew that this commercial-paper market was off-limits to companies the size of $20-million Lehigh Valley Industries Inc., where he is executive vice-president. Lehigh, a New York City diversified manufacturer whose products include alloy castings and women's shoes, would have to settle for bank loans at one to two points above prime.

But as of last year, that all changed as Lehigh suddenly found that the world of commercial paper wasn't so inaccessible after all. It began simply enough, with a telephone call. An assistant treasurer at Lehigh listened politely as a representative from newly formed Dimensional Credit Corp., based in San Francisco, talked of an untapped source of working capital. Instead of the usual brush-off, the assistant treasurer mentioned the phone conversation to Fried, who decided it was worth pursuing.

Lehigh was just one of many companies that the sales team from Dimensional had contacted. Like Fried, the representative from Dimensional had been wondering about the $225-billion commercial paper market and speculating about how to open it up to smaller companies. The credit firm knew that getting an insurance company to guarantee the paper would be the key, but finding a willing insurer proved difficult. Dimensional talked with at least 10 insurance companies, recalls vice-president of marketing Michael Kieschnick, but many more wouldn't even give Dimensional a hearing. "It was just too sophisticated for most of them," Kieschnick says, adding that most insurance companies questioned its idea of basing credit decisions on a company's stock value.

Lehigh wasn't shopping for money in the fall, but Fried met anyway with the representative from Dimensional, which by now had found a willing insurance company to back its program. "There were many disbelievers in my own company when the concept was first introduced," Fried recalls. But the man from Dimensional impressed Fried with his knowledge of Lehigh's finances -- information Dimensional had culled from the company's quarterly and annual reports to the Securities and Exchange Commission. They discussed Lehigh's credit history and capital needs, and the Dimensional representative explained its package. If approved, Lehigh would be given a line of credit, which Fried could draw upon at will. Each time Fried called a toll-free number to request money, he would be told how much it would cost. Dimensional's customers typically pay somewhere from 1.5 to 2.25 points above Dimensional's own costs of funds, which in late January came to between .5 and 1 point below prime.

Dimensional's paper, backed by Industrial Indemnity Co., is sold by goldman Sachs & Co. to the same institutional investors that buy the offerings of IBM and AT&T. Dimensional would pool the credit demands of Lehigh and other customers and parcel out the money accordingly. Besides offering working capital at a rate less expensive than a commercial bank's, Dimensional told Fried that Lehigh would not have to pay loan commitment fees or keep any compensating cash balances on deposit, as banks often require of their customers. If Fried wished, Dimensional would supply a software program containing its credit-evaluation model, and Fried could analyze Lehigh's credit rating on his personal computer. Dimensional told Fried that Lehigh's credit was based, in part, on the market value of Lehigh's stock. If Lehigh's stock appreciated, its credit rating would improve.

"Our bankers have historically asked us for one to two points over [the prime rate]," says Fried. Dimensional, he says, was able to offer a $3-million line of credit at an interest rate near or below prime. Furthermore, the debt is unsecured. As of mid-January, Fried had made one request for capital, a process that involved one telephone call and a wait of about 24 hours for the money to be wired from Dimensional's New York bank to Lehigh's checking account. "I found that it was quite easy," Fried says. "The loan documents were in plain English and to the point. The loan agreements were only a few pages."

Dimensional is affiliated with a $1.2-billion money-management firm, Dimensional Fund Advisors. Dimensional Credit has received the highest possible rating from the two leading credit-rating agencies, Moody's Investors Service and Standard & Poor's Corp.

A company's borrowing ability is based heavily on the ratio of its current liabilities to its total market value, which includes the market value of the stock. A company with low earnings might carry a high stock-market value, for instance, if traders fancied the firm as a turnaround prospect. A company in a mature industry might, on the other hand, have current high earnings but a low market value.

"Of the thousands of public companies, probably 80% would qualify, or be worth considering," says Kieschnick, estimating Dimensional's potential market. Right now, Dimensional is offering the program only to public companies, although Kieschnick says the goal is to extend it to private companies as well.

In its first month of operation, says Kieschnick, Dimensional extended credit lines totaling $150 million -- of which about half has been used -- to more than a dozen companies. "I think [credit lines] will appeal to that segment of the market that cannot do this themselves," says Henry M. Dubrow, treasurer of $60-million MacGregor Sporting Goods Inc., which established a $4-million line of credit in December at an interest rate of about 10%.

"It's not our goal to replace the banks," says Kieschnick, although he acknowledges that doing business with Dimensional may interfere with the relationships some companies have with their commercial lenders. Kieschnick says that banks have responded differently to Dimensional. Smaller banks whose lending limits may prohibit them from extending further credit to valued customers have greeted the concept favorably. Bit banks, which view Dimensional as a potential competitor, have been cooler. In some cases, Kieschnick says, specific loan covenants prohibit bank customers from obtaining credit from other sources.

As for Fried, he acknowledges that Lehigh is not about to stop doing business with its bank. But he enjoys the flexibility that an additional source of working capital provides to his company. "Maybe, as a result of this," he suggests in an after-thought, "the normal lending banks will look upon us a little differently."