You probably heard about acceptable loans if you’re into trading. Learn more about acceptable loans to ensure you get the best of it. If you are interested in getting this type of loan, here’s what you need to know.
Acceptable loans explained
Acceptable loan or acceptance loan is a type of loan that enables an importer to pay for imported goods in deferred payments.It is a non-cash loan,also known as acceptance credit, is a contractual agreement that is paid by a time draft authorizing payment on or after a certain date.
Acceptable loan, also called acceptance financing, is typically used in international trade. Banks and other finance companies issue acceptances. Under a mutual agreement between the exporter and the importer, the payment of the goods may be made on specific payment dates following the dispatch of the goods. Banks enacting as banker’s acceptances facilitate international trade, guaranteeing the payment for goods.
How Acceptable Loans work?
A banker’s acceptance is also called a bank bill. It is a time draft drawn on and accepted by a bank.The paper is a bank-backed, short-term, non-interest bearing note. It also qualifies as a money market instrument.
An acceptor is most likely a bank, which is represented by a person, who is expected to pay the draft. The acceptor writes “accepted” or similar wording indicating acceptance, next to his or her signature along with the date signed. It is the acceptor’s obligation to make the payment by the maturity date.
Before the “acceptance”, the draft is not an obligation of the bank. The draft is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a specified person or to the bearer of the draft. If an authorized bank employee stamps the draft “accepted” and signs it, that’s when it becomes a primary and unconditional liability of the bank.
Since the draft is a money market instrument, the exporter can request that the banker’s acceptance be sold in the money market if he is not willing to wait for payment. The accepting bank is obliged to pay the holder of the draft at the date of maturity. The draft may be readily sold in an active market if the bank is well known and has a good reputation.
The bank accepting the drafts charges an all-in-rate. In general, all-in-rates are lower than bank loan rates. It includes discount rate and the acceptance commission. The draft charges usually fall between the rates of short-term Treasury bills and commercial papers.
Banks may also create an acceptance credit facility that allows a company to issue time drafts not linked to specific shipments to finance general working capital. Banks may create an issuing company with a discounted amount made available to it until the bill’s maturity when it is obliged to repay the bill’s full face value to the bank.
Types of Acceptable Loans
Unconfirmed acceptance credit means that the seller takes the risk that payment will not be made. Unconfirmed acceptance credit has the risk due to any number of contingencies such as shipment non-delivery, confiscation by customs authorities, or any other problems, the buyer cannot stop payment or otherwise prevents redemption of the acceptance credit.
Confirmed acceptance credit means that the bank upon which the credit has been issued, essentially guarantees payment as long as the terms of the letter of credit have been complied with. Confirmed acceptance credit is more expensive to establish than unconfirmed acceptance credit because the issuing bank is effectively guaranteeing payment.
When the goods are shipped, the seller presents its time draft and the specified documents to the accepting bank’s correspondent, which forwards them to the accepting bank. If the documents are in order, the accepting bank takes them, accepts the draft, and discounts it for the exporter.
Alternative to Acceptable Loan: Letter of Credit
An alternative form of acceptance financing available to the importer involves a letter of credit. The exporter may agree to letter of credit, where the importer has its bank issue a letter of credit on its behalf in favor of the exporter. It involves a bank notifying the exporter of the letter of credit through a correspondent bank in the exporter’s country.
Many banks, regardless of size or complexity, issue letters of credit on behalf of their clients.A letter of credit gives the beneficiary increased assurance that promised payments or performance will be fulfilled.The bank issuing the letter of credit is substituting its creditworthiness for that of its client.
The issuing bank will receive a payment from the importer, usually the cost of the letters of credit along with some fees. The required documents typically include a draft, a commercial invoice, and a receipt for shipment
Acceptable Loans in the UK
Acceptable loans are made most often in connection with international trade especially with U.S. imports and exports and trade between foreign countries, but acceptance loans are now available in the UK.
Once the importer and bank have completed an acceptance agreement, the importer draws a time draft on the bank. The bank accepts the draft and discounts it, giving the importer cash for the draft but gives it an amount less than the face value of the draft. The importer uses the proceeds to pay the exporter. Once the bank agrees to accept drafts for the importer and the importer agrees to repay any drafts the bank accepts, a time draft will be drawn by the importer.
The bank may hold the acceptance or may sell it, or rediscount it in the secondary market. The importer pays the bank the value of the acceptance on or before the maturity date. Otherwise, the bank may sell the acceptance to the money market.
Aside from banks, other financing companies may make acceptances. Such acceptances are referred to as trade acceptances, refinancing, or accommodation acceptances. Acceptances are mainly used to finance trade between foreign countries. A refinancing acceptance may be made from a time draft drawn by a foreign bank on a UK bank to finance a client’s transaction.