Mitigating Techniques for Commercial Risk/Banker's Acceptances-Transference
Banker’s Acceptances -Transference
A banker’s acceptance is a method of financing that banks can use to provide customers with short-term (six months or shorter) financing for trade transactions. Acceptances may be less expensive than more traditional trade financing methods. A banker’s acceptance is a time draft drawn on, and accepted by, a bank. By accepting the draft, a bank indicates its commitment to pay the stated amount of the draft on a specified future date. The draft may then be sold to an investor for a money market rate of return base on the credit risk of the bank.
Acceptance financing has been used for decades as a form of bank loan. The ability to fix rates for periods of up to 180 days protects the borrower from adverse movements in interest rates up to six months. Banks offer banker’s acceptances in a wide range of maturities to match their customer’s sales cycles and payment terms. A banker’s acceptance begins with a financial instrument issued in negotiable form, commonly called a “time draft” or “usance draft.” This is a draft drawn on a bank usually by an importer or exporter for a certain sum of money payable in the future. The drawee’s bank thereupon signifies acceptance of the obligation by stamping the work “accepted” across the face of the draft.
Traditionally, importers used bankers' acceptances to finance imports into the United States. Today acceptance financing is used to finance a wide range of activity such as imports, exports, domestic shipments, domestic purchases, and commodity warehousing of readily marketable products.