The Benefits of Banker's Acceptance Use in International Trade

by Phillip Presley Student

It would be a grave understatement to say that the economy has suffered both domestically and globally over the last few years since the financial crisis of 2008. Facing the worst economic climate since the Great Depression, U.S. leaders have struggled to come up with a plan to steer the country back toward financial stability. The effects of the U.S. Recession have been felt across the globe. Since the U.S. is one of the leading financial superpowers of the world, the collapse of its economy has caused the import and export trade markets to suffer.

Given this recent economic upheaval, it is understandable that companies might look for ways to cut costs and seek new opportunities to make a profit in an increasingly global economic climate. However, this requires potentially doing business with companies overseas that they may not completely trust. These companies could benefit from having some form of protection from making a faulty investment. One effective form of protection is banker's acceptance, which has experienced a boom in popularity recently.

A banker's acceptance is the international business equivalent of a post-dated check or a promise to pay. The company seeking the bank acceptance must first acquire a promise to pay document from an investor. In this case, the company would be the “promissory,” or the party seeking the document, and a bank would be the investor. The promissory company will agree to pay the established amount at a future date and, at this point, the document is called a time draft. The date is established, the document is signed and stamped as “accepted” by the promissory, and the promissory now owes the signed amount of money to the bank by the established date. Since the bank has now accepted the promise to pay, the document is termed a banker's acceptance.

The bank then goes to the payee, the company that the promissory intends to do business with, and gives them the payment, which will fully mature at the previously established date. The banker's acceptance is also, of course, subject to interest paid on the part of the promissory.

This type of transaction is logical for international trade matters, especially now that new companies are emerging that don't have established reputations and other companies that are not quite financially stable are attempting to do business. For example, if a brand new Italian tire manufacturer (for this example named Fratelli) wishes to do business with an American car company (named Eagle), but lacks the funds to complete a transaction, Fratelli would seek a banker's acceptance so that Eagle can do business with a known and trusted entity – the bank. Fratelli will have had a solid payment record with the bank but most likely no record of doing business with Eagle. Since Eagle knows the bank won't fold or default on the payment, Eagle is more likely to accept this as a form of payment for the transaction.