According to Spaulding (2017), a banker’s acceptance also referred to as the bill of exchange is simply a business bank draft that requires a given bank to recompense the instrument’s holder a specified sum of money and at a particular date. Often, it is paid 90 days from the date when it was issued; however, it might range between one and 180 days. Often, its issuance occurs at the specified discount and later on fully paid once it is due at interest. In a situation where it is presented before the agreed date for payment, it will follow that the amount paid would be slightly less than the interest to be earned if it were let to mature (Spaulding, 2017).
International trades often use banker’s acceptance as one of the effective means of ensuring payment. Therefore, since firms will engage in the international trade and deal with unfamiliar clients and financial systems, they utilize banker’s acceptance to assure timely and secure transactions which will act as intermediaries to efficiently facilitate the operation. According to Spaulding (2017), the bank of the exporter sends the contract’s condition to the bank of the importer. Once the good have been shipped, the importer authorizes the bank to pay as per the contract’s agreement. For instance, in an event where an importer wishes to import commodities from one of the foreign states, he or she will receive a letter of credit from the bank he operates with then forwards the letter to the importer (Spaulding, 2017). The bank issues the letter of credit which will guarantee importer’s draft payment for a particular time and sum. In such a case, the exporter will have to rely on the credit of the bank rather than the credit of the importer.
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According to Spaulding (2017), the exporter will present the letter of credit and shipping document to her domestic bank that she will ensure to pay for the letter of credit within the discount specified. The exporter’s bank will then send a time draft to the bank of the importer which will further stamp “accepted” in the process transferring the time draft to a banker's acceptance (Spaulding, 2017). Such a negotiable tool is often backed by the importer’s promise to pay, the guarantee of payment of the bank in addition to the imported goods.
Banker’s acceptance has been shown to be highly safe which makes them be often used as the financial instrument within the international trade and transactions. Bankers acceptance allows the international institutions to complete their transactions without necessarily having the need to extend credit. According to Spaulding (2017), exporters often will feel safer to rely on the payment for the transaction from one of the reputable bank than from a business that they might not have its relevant background information or history. Therefore, the moment the bank “accepts” the banker’s acceptance it becomes a fundamental obligation of that particular institution (Spaulding, 2017). Further, on most occasions, an importer might decide to use the banker’s acceptance especially when it has trouble acquiring other forms of financing or in a case where the banker’s acceptance is one of the least expensive options available.
In conclusion, the banker's acceptance will guarantee exporter’s payment to ensure that the credit risk of the importer is minimized. Therefore it will enable an importer to import commodities without having to be turned down as a result of the uncertainty of their credit standing. Lastly, it is also considered as a revenue generator to the banks because the banks will receive a fee for the services.
References
Spaulding, W. (2017). Bankers Acceptances (BAs) . Thismatter.com . Retrieved from http://thismatter.com/money/bonds/types/money-market-instruments/bankers- acceptances.htm
