Taking a page from subprime lenders in other markets, a New Jersey commercial finance company has created a niche in unsecured trade finance loans.
Called trade acceptance drafts, the short-term loans target importers and others that lack ready bank credit lines.
Bankers say they know of no similar program, though several say the business is one they would just as soon avoid. Still, Actrade Capital Inc. of Somerset appears to have tapped a growing market.
Actrade's sales were $16.5 million in its first year, 1995, and $208 million in fiscal 1999, which ended last June 30. Net income in that period went from less than $500,000 to $6.2 million, and Mr. Stonkus predicts sales for the current fiscal year could rise 40%.
"Banks have traditionally been unwilling to venture beyond lending on a secured basis," says Alexander C. Stonkus, president and chief operating officer. "Our program is significantly different because we advance 100% of the payment minus our discount on an unsecured basis."
Trade acceptance drafts, or TADs, function very much like checks. Actrade, which has more than $80 million in revolving lines of credit from Summit Bancorp, Portugal's Banco Atlantico, Bank of Montreal, and Amsterdam based ING Group, issues the drafts to an importer or buyer of goods.
The buyer then uses the TAD to pay the supplier, which gets paid by Actrade immediately on receipt of the goods, minus a 2% commission deducted by Actrade. Actrade, in turn, collects payment of the draft from the importer or buyer, which has up to six months to reimburse the amount owed in monthly installments at varying interest rates.
At a minimum, Actrade collects 24% a year on the amount of drafts it has outstanding, making a handsome profit on the spread between what it pays the banks to finance the drafts - or a spread over the London interbank offered rate - and what it collects.
"The potential market for TADs runs into billions of dollars," says Mr. Stonkus. He added that Actrade is discussing possible ventures with banks and technology companies, which he would not identify.
Though any banker would drool at the spreads that Actrade collects, bank trade-finance specialists say they doubt they will adopt similar instruments.
Robert S. Krant, senior vice president and head of international operations at City National Bank in Los Angeles, suggests there is a ready market for such instruments, especially in parts of the country serviced by banks that do not provide trade finance.
But he dismissed the possibility that City National, which itself is heavily involved in trade finance, will enter that market.
"The main difference between a bank and a finance company is that banks don't like to do unsecured lending," Mr. Krant says. "Call us crazy, but banks still like collateral - otherwise we would just get into providing equity and would probably wind up getting paid a lot better."
Others sounded a similar note, observing that a range of unsecured lending has proliferated during the U.S. economy's streak.
"We're certainly always looking at new ways to transact business, and this is something that would merit a closer look," said Michael Rinkus, first vice president and group manager for trade finance at Comerica Inc. in Detroit.
But he said that, as a bank, Comerica has to be careful about nonsecured lending, because " we have responsibilities both to the integrity of the financial system and to our shareholders."