Trade Acceptance, Bankers’ Acceptance, Draft, Collection, Letter Of Credit, Beneficiary

DOCUMENTARY COLLECTION: TRADE ACCEPTANCES

As in any business, trade buzzwords exist in the international arena and each has its own particular and sometimes peculiar meaning, such as “trade acceptances” and “bankers’ acceptances.” In keeping with the theme of this book, let’s develop some scenarios rather than furnish dry academic definitions.

EXTENDING CREDIT TERMS

An importer in the United States purchased veterinary tools from a supplier in Pakistan. He developed a high level of trust after several years of a satisfactory working relationship. As a result, the supplier extended 90 days terms to the importer.

The supplier wanted to strengthen his balance sheet to impress his banker in order to obtain financing. He requested an obligation from the buyer to provide something a little stronger than “foreign accounts receivable” on his financial records. At the time of each shipment, the supplier prepared typical shipping documents plus a draft drawn on the buyer payable in 90 days.

The supplier presented the draft with attached shipping documents to his bank on a collection basis. The supplier’s bank couriered the documents to the buyer’s bank in the United States, which then requested the buyer to acknowledge his obligation to pay in 90 days by accepting the draft. The bank stamped the face of the draft with a stamp which said, “Accepted,” and asked the buyer for a signature and date on the draft. At this point the buyer has a legal obligation to pay when it matures in 90 days.

TRADE ACCEPTANCES VS BANKERS' ACCEPTANCES

This is known as a “trade acceptance” to distinguish it from a “bankers’ acceptance,” drawn and accepted by a bank.

Bankers’ acceptances most commonly occur in letter of credit transactions. The terms of the letter of credit require the beneficiary to present a draft for acceptance and state that it is payable at some future date. When a bank accepts a draft, they obligate themselves to pay at maturity. Investors generally perceive that bankers’ acceptances carry less risk than trade acceptances. In fact, a secondary market exists for bankers’ acceptances, which allows investors to readily buy and sell them. No established secondary market exists for trade acceptances.