International trade and commerce is an extremely dynamic space, where transactions happen across geographical boundaries and span continents and cultures. In such a vibrant scenario, credit works as the lifeblood that sustains the steady flow of commerce and capital around the globe. Importers and exporters are heavily dependent on easily accessible and reliable credit mechanisms provided by financial institutions. Among these, acceptance credit has emerged as a widely preferred financing mechanism, often utilised by traders as it offers security and assurance of payment to both parties involved in the exchange. It is essentially a type of Letter of Credit (LC), which is a guarantee document, issued by a bank that ensures that the seller of the goods is paid in full by the buyer. This assurance ensures that the seller gets the payment they are owed by the buyer, provided the seller has held up their end of the transaction. So, what is acceptance credit, exactly?
What is the meaning of acceptance credit?
Acceptance credit refers to a credit document that allows an exporter to draw a bill of exchange, which must be honoured by the buyer within a specific time. The bank or the concerned financial institution accepts the bill, following which it is discounted or withdrawn. Once the acceptance process is complete, the beneficiary receives the amount at the applied discount. Acceptance credit facilities can only be availed by companies and entities that run a line of credit with their respective banks to expand their business operations.
Acceptance process explained
The issuance of an acceptance credit concludes the documentary process in the exchange of goods between an exporter and an importer. The exporter’s bank collects documents from the exporter and presents them to the importer (the buyer). The documents basically list the items being imported. Once the buyer approves the list and accepts the documents, they need to pay the invoice as per the agreed upon terms and conditions.
When bills of exchange are payable after a certain predetermined period, they are known as usance bills. Under the acceptance credit process, the usance bills are presented, accepted, and eventually honoured according to their due dates. An example of this process can be seen when a cloth importer purchases material from an international supplier and receives the shipment after a few days of placing the order. The supplier sends the buyer a bill of the goods ordered and delivered. However, the bill may allow the importer to clear the amount within two weeks or some other specified period. This period becomes the usance for the sale.
Types of acceptance credit
There are primarily two types of acceptance credit - confirmed and unconfirmed. In the case of a confirmed acceptance credit, the bank that has extended the credit to the buyer basically guarantees payment to the seller or the exporter, in case the buyer is unable to pay, which can be a result of a variety of issues. On the other hand, if the acceptance note is unconfirmed by the issuing bank, then there is no assurance of payment, in case the buyer defaults. This case usually arises when the bank has low confidence in the financial viability of the buyer.
Benefits of acceptance credit
An acceptance credit note or letter is essentially a banker’s acknowledgement of a time-based payment assurance to the seller issued on behalf of the buyer. At its core, it works like a post-dated cheque. Given the nature of its design and functioning, these credit facilities offer high flexibility of payment to goods traders. As the period of transaction is specified, the buyer can honour the payment as per the time frame agreed upon in the bill. If the seller needs money urgently, they can simply discount the invoice approved by their bank and get immediate access to the amount needed. At a broader level, the acceptance credit system facilitates trade and commerce between unknown entities in a safe and secure manner due to mediation by banks or other regulated financial institutions.
Key learnings
To conclude, acceptance credit commands a critical position in the world of international trade, bridging the gap between buyers and sellers unfamiliar with each other and enabling bus International trade and commerce is an extremely dynamic space, where transactions happen across geographical boundaries and span continents and cultures. In such a vibrant scenario, credit works as the lifeblood that sustains the steady flow of commerce and capital around the globe. Importers and exporters are heavily dependent on easily accessible and reliable credit mechanisms provided by financial institutions. Among these, acceptance credit has emerged as a widely preferred financing mechanism, often utilised by traders as it offers security and assurance of payment to both parties involved in the exchange. It is essentially a type of Letter of Credit (LC), which is a guarantee document, issued by a bank that ensures that the seller of the goods is paid in full by the buyer. This assurance ensures that the seller gets the payment they are owed by the buyer, provided the seller has held up their end of the transaction. So, what is acceptance credit, exactly?
