The Use of Bankers Acceptances in International Trade

Here in the United States, it seems like our economy has been in a state of uncertainty for the past six years or so. In fact, most people would be hard pressed to be able to remember a time when investors were not sitting on the financial fence trying to decide which way to jump. Because of all of this uncertainty, many investors have been turning to international trade, lately.

International trade is arguably more beneficial than domestic trade, as it allows for the exchange of:
• Goods
• Services
• Capital
among a number of different countries and regions without investors having to be encumbered by a variety of obstacles. In fact, for most developing nations, international trade is probably their most important source of revenue.
International trade can help to stabilize some of the seasonal market fluctuations. It also has a tendency to increase sales and profits, domestic competitiveness, and may reduce dependence on existing markets. International trade can also help many businesses expand and takes advantage of a wide variety of international trade technology. It can extend the sales potential of many existing products, as well. There are many benefits of international trading for the average investor.
One great tool in the process of international trade is the usage of Bankers Acceptances. For instance, the exporter of a good or service in the United States can offer terms to an overseas buyer through the usance (time) letter of credit mechanism. The export letter might require that the beneficiary’s drafts be drawn at a specific time, such as within a certain number of days after the sight or bill of lading date.
Usually, the drafts are drawn on the exporter’s bank. When the buyer’s bank has approved the documents under the letter of credit as a conforming drawing, the “accepted” draft then becomes a banker’s acceptance.
Basically, bankers acceptances (BA) are time drafts on a bank where one party is unwilling to offer their goods or services to another party based on their credit. This financial tool is primarily used in international trade. A BA is issued by a customer when they order their bank to pay a provider of goods or services a specific amount of money on a predetermined date.
After the bank has accepted the order, they are then responsible for paying the vendor for their services or goods. In essence, the customer uses their bank’s credit rating to finance a transaction.
In international trading, BAs can be very helpful. For instance, BAs allow exporters to give their foreign buyers the choice of financing their trade cycle at the BAs current rate in the United States. The exporter’s credit risk then becomes that of the bank on which the draft for the BA was drawn as an irrevocable undertaking pay to the exporter at its maturity. The BA rate for buyers in developing countries is typically a much better one than can be had in their own country.
Exporters can also finance a foreign sale at a better rate through the usance letter of credit than under its own bank line of credit based on Prime. Exporters are able to extend the terms of the financing without having to use their own line of credit.