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Acceptance Financing for Exports
Acceptance is a short-term credit instrument involving a written order requiring a buyer to pay a specified sum on a specified date to the seller. The Acceptance is signed by the buyer to indicate its intention to honor this obligation. Acceptances are typically used to finance imports. Acceptance financing may allow a seller to finance foreign sales on a short-term basis.
Banker’s acceptances are most commonly created to finance current import and export transactions.Based on various factors, the bank will determine the fee or discount and the amount it will advance to the seller. If this amount is acceptable to the seller, the bank will accept the draft, discount it, and credit the seller's account with the discounted proceeds. The draft may be discounted in due course in the bankers' acceptance market, or it may be held in the bank's own portfolio. The bank then pays the face amount of the acceptance to the person presenting the draft at maturity, and will in turn receive full payment from the customer.
Trade acceptances are not as negotiable for discount as a bankers' acceptance for obvious credit reasons. If discounted, they do not enjoy the same premium rates because of their restrictive or limited marketability to investors.
Financing with a Trade Acceptance
A bank customer wanting to finance a trade transaction employing a Trade Acceptance as collateral will find three methods that its bank may be willing to approve.
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The bank may purchase the trade acceptance at a discount. The purchase could be made either with or without recourse. If the bank purchases a trade acceptance without recourse, then it must be satisfied with the credit risk of the drawee, and the drawee's country [if applicable].
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The bank could make a loan advance using the trade acceptance as collateral. Usually the amount of such an advance is up to 75% of the face amount of the acceptance. The payment proceeds of the trade acceptance at maturity would be used to pay the principal and interest. This type of financing is usually done only on a full recourse basis meaning that if the buyer defaults for any reason the seller must repay the bank in full for the advance as well as any accrued interest. Note: Higher advance rates of up to 95% may be available if the exporter has export receivables credit insurance. (See Export Financing.)
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Instead of a loan advance, the bank could agree to the customer drawing a bankers' acceptance against their credit line using the trade acceptance as collateral or security. In those circumstances, the trade acceptance must mature a few days prior to the bankers' acceptance.
Financing with a Bankers' Acceptance
A bankers' acceptance was previously defined as a time draft drawn by an obligor on a bank for a certain sum of money payable in the future. The drawee bank thereupon signifies its acceptance of the obligation by placing the word "Accepted" across the face of the draft. The acceptance date and official signature is also added. Since the banker's acceptance is a negotiable instrument, the payee may readily obtain immediate funds by selling the banker's acceptance at a discount to the drawee bank. The marketability is limited only by the reputation of the accepting bank and market demand.
The payee or a holder in due course of the acceptance will receive from the sale the net proceeds by deducting from the face amount the sum of:
- The discount or finance charge, plus
- The accepting bank's commission
When the bankers' acceptance matures, the bank will pay the face amount to the presenting holder while at the same debiting their customer's account. The debit to the account stems from a repayment agreement called an "Acceptance Credit Agreement" between the accepting bank and its customer and is the bank's "consideration," along with a line of credit, for accepting the time draft.
Edited by Michael Dennis, author of "Credit and Collection Handbook." Mr. Dennis is a consultant. He can be reached with questions or comments by email at mcdennis13@yahoo.com