Trade Acceptances

Trade acceptances are simply time drafts drawn on an individual or commercial entity rather than a bank. As the buying and selling of merchandise is involved, a trade acceptance begins with an importer convincing an exporter to ship merchandise on a "collection basis" with terms of documents against acceptance (D/A terms). This means that the seller/exporter will deliver the shipping documents through its bank (remitting bank) to be delivered to the collecting bank (usually the importer's bank).

In theory, the collecting bank will only deliver the shipping documents against the importer's acceptance of the time draft. The collecting bank then keeps the draft for safekeeping until maturity - at which point the buyer is expected to return and pay the draft.

At maturity the collecting bank collects the face amount of the acceptance plus any interest due [as indicated on the acceptance] and send funds to the seller's remitting bank. The exporter also has the option of requesting the time draft to be returned to it for safekeeping until maturity. However, under this method requires the seller to safeguard the draft until maturity.

Note: Documents against acceptance terms are akin to open account payment conditions, with the support of a negotiable instrument. The accepted note may be used as a basis for financing (acceptance financing). In addition, payment at maturity is not automatic. The drawee must fund the draft or give specific authorization before the collecting bank will remit payment to the presenting bank.

Edited by Michael C. Dennis, author of "Credit and Collection Handbook."