Legal Definitions - acceptance credit

Acceptance credit refers to a financial arrangement where a bank formally agrees to pay a draft (a written order to pay a sum of money on a specified future date) presented by a seller. By "accepting" the draft, the bank takes on the primary responsibility for payment, transforming the draft into a highly secure and often tradable financial instrument known as a banker's acceptance. This mechanism provides assurance of payment to the seller while allowing the buyer (who arranged the acceptance credit) to defer payment until the draft's maturity date. It is closely associated with a time letter of credit, which is the underlying bank guarantee that leads to the bank's acceptance of the draft.

• Example 1: International Trade for Capital Goods

  A manufacturing company in Brazil (the buyer) wants to purchase specialized industrial machinery from a supplier in Germany (the seller). The German supplier requires a guarantee of payment but is willing to offer 180 days for the Brazilian company to pay after shipment. The Brazilian company's bank issues a time letter of credit to the German supplier. Once the machinery is shipped and the German supplier presents the required shipping documents along with a 180-day draft to the Brazilian bank, the bank "accepts" this draft. This act of acceptance creates an acceptance credit. The German supplier now holds a banker's acceptance, which is a secure promise from the Brazilian bank to pay in 180 days. The supplier can either hold this until maturity or sell it at a discount to another financial institution for immediate cash, while the Brazilian company benefits from the extended payment terms.

• Example 2: Domestic Supply Chain Financing

  A large supermarket chain (the buyer) places a substantial order for perishable goods from a regional farm cooperative (the seller). The supermarket chain typically pays its suppliers in 45 days, but the farm cooperative needs funds sooner to cover immediate harvesting and transportation costs. The supermarket chain arranges for its bank to issue a time letter of credit in favor of the farm cooperative. Upon delivery of the produce and presentation of the necessary invoices and a 45-day draft, the bank accepts the draft. This bank acceptance constitutes an acceptance credit. The farm cooperative now has a bank-backed promise of payment in 45 days. It can then take this banker's acceptance to another financial institution and discount it, receiving immediate cash, thereby bridging its working capital gap, while the supermarket chain maintains its standard payment cycle.

• Example 3: Financing for a Construction Project

  A construction firm in Canada (the buyer) is building a new commercial complex and needs to purchase a large volume of custom-fabricated steel beams from a specialized fabricator (the seller). The fabricator requires payment assurance within 90 days of delivery, but the construction firm's payment schedule from the project owner also runs on a 90-day cycle. To align these cycles and provide security, the construction firm's bank issues a time letter of credit to the steel fabricator. Once the steel beams are delivered and the fabricator presents the delivery documents and a 90-day draft to the bank, the bank "accepts" the draft. This bank acceptance creates an acceptance credit. The fabricator now holds a secure instrument, guaranteed by the bank, ensuring payment in 90 days. The construction firm benefits by not having to pay upfront, aligning its outgoing payments with its incoming project funds.