Table of Contents
- 1 Meaning of Trade Acceptance
- 2 Usage
- 3 Procedure for Trade Acceptance
- 4 Example
- 5 Advantages of Trade Acceptance
- 6 Disadvantages of Trade Acceptance
Meaning of Trade Acceptance
Trade Acceptance refers to a contractual obligation acknowledging the existence of a debt. It is a time draft or bill of exchange for a specific amount and maturing at a particular date. It is drawn by the seller on the buyer of the goods and bears his acceptance to pay, and often noting the place of payment.
Trade Acceptance is a promise to pay by the buyer to the seller. The promissory note is a draft which is then signed and the word “Accepted” is written by the buyer. The date on which the payment will be made is also mentioned. Therefore, this draft gets it’s name “Trade Acceptance”. This draft now becomes a legal obligation for the promissory and is a commitment on his behalf to make the promised payment on the due date to the beneficiary.
Trade Acceptances are less riskier than “Open Account” sales in international trade as they have legal validity. On the other hand, they are a bit riskier than a “Letter of Credit” sale. But since obtaining a LOC is more tedious with a lot of formalities to be adhered to, is expensive and time-consuming, Trade Acceptances are a good option in International trade.
Trade Acceptance has primary usage in International Trade. It is a contract between the importer and exporter of the goods, stating the maturity period after which the payment will be made by the importer. This contract has legal validity. Therefore, there is no risk of default.
Exporter’s bank is responsible for collecting the payment from the importer’s bank. A Banker’s Acceptance is prevalent in international trade. It means that the Acceptor of the contract is the Bank. The bank accepts the draft on behalf of the promissory, or the importer of the goods. The importer pays to the Bank. The Bank, in turn, makes the payment to the beneficiary or the exporter’s Bank. As a result, the bank becomes the liable entity to pay the due amount at the said maturity date. The exporter gets assured that there will be no default of his payment and he will get it timely.
Procedure for Trade Acceptance
There are two ways to deal with Trade Acceptance.
Documents against Acceptance
The exporter or seller makes the shipment and forwards the shipping documents along with an acceptance form or time draft to the importer’s bank. The bank presents it to the importer and once accepted, it becomes a legal document. The importer accepts the liability to make the payment at a specified future date. Exporter gets back the acceptance. The importer gets the shipping documents from his bank. He can present it at the shipping port and take possession of the goods.
Documents against Payment
In this case, the importer is first required to make the payment to the bank, after which the bank hands over the documents to him. It is also called Cash against Documents or a Sight Draft because it is paid at the sight of the documents. The importer can now take possession of the goods from the shipping port.
XYZ Dealers has to buy 5 German Cars for its showroom. It does not want to pay for the cars upfront as it does not know the supplier company. Even the supplier company is not ready to export the cars to the dealer without payment.
XYZ Dealers decides to approach its bank with which it has an account for many years. It has an excellent credit record and goodwill with its bank. The exporter sends the shipping documents to the bank along with the time draft. ‘XYZ dealers’ accepts the draft with an agreement to pay the exporter the amount for 5 cars after 10 days of receipt of the cars. It can thoroughly check the cars in the meantime and raise a complaint, if required, before making the payment.
The bank knows the dealer very well and accepts the draft on behalf of XYZ Dealers. It sends the draft to the exporter and hands over the shipping documents to the importer. The exporter gets the assurance of his payment and the importer gets the delivery of the cars. This is the case of Documents against Acceptance.
In the above example, if the Bank is unwilling to take the risk, it can ask XYZ Dealers to first make the payment before handing him the papers of the consignment. XYZ Dealers deposit the full payment with the bank and then receive the papers of the shipment. This will be the case of Documents against Payment.
Advantages of Trade Acceptance
The advantages of Trade Acceptance for the seller or the exporter are:
Definite payment at maturity
The exporter has a legally binding in the form of “Acceptance” of the buyer specifying the time and place of the payment.
Additional Credit Facility
‘Trade acceptances’ are useful in availing credit facilities from a bank. They can be discounted at up to 100% of their face value. Therefore it is very useful even before maturity to raise money.
The advantages of Trade Acceptance for the buyer or importer are:
Since banks become involved in the contract, the deal becomes almost risk – free for the buyer. Hence, he need not worry about making advance payment for the goods to an unknown supplier and not receiving the goods at all. Timely despatch and delivery become assured.
Exporters prefer acceptance from buyers. They look for buyers with a history of successful completion of acceptances. As a result, the importer becomes more credit-worthy. His goodwill also strengthens in the international trading world.
Disadvantages of Trade Acceptance
There is a risk of fraud with Trade Acceptances. It is extremely important to ensure the genuineness and validity of the Trade Acceptance. Banker’s Acceptances have been issued without that Bank even being in existence, or without having adequate capital or the bank going bankrupt after issuance of the acceptance. In cases of delivery against acceptance, many times bank officers fail to verify the true worth of the importer. They may handover the shipping papers without doing proper research and the exporter might never receive the payment. Bank stamps and signatures of officers are also stolen or forged to create fake trade acceptances.
Therefore, checking the genuineness of trade acceptance and the issuing bank becomes extremely important. Verification by calling the issuing bank, the exporter’s own bank and consulting the ICC- International Chamber of Commerce before entering into the contract should be done.1,2