A:

A merchant would use a banker's acceptance for several reasons, particularly when engaged in international trade. One of the most common examples occurs when an exporting firm does not grant credit to an importing firm, causing the importer to turn to its bank for help. More often, the exporter's bank agrees to work with the importer's bank directly; each bank is held responsible for its customer's actions.

Reputation and Credit

If you want to purchase an item on credit from a clothing retailer, the retailer first performs some underwriting through a credit application to ensure that you are a trustworthy trading partner and could pay it back.

The same concept holds when an importer and exporter are dealing with one another and the importer needs some financing to afford the purchase. In most cases, the exporter is skeptical about dealing with a foreign party who is halfway around the world.

To prove the quality of its reputation, the importer might go to its bank and have the bank issue the equivalent of a post-dated check. The bank promises to pay the exporter a specified sum of money on a specified future date. When that date arrives, the bank debits the importer's account for the value of the promised amount to make itself whole. This kind of promissory document is known as a banker's acceptance.

Bank to Bank

The exporter isn't the only party that needs protection. The bank that issues the acceptance needs to verify that the goods were delivered; it doesn't want to pay for less than what it agreed to. The importer's bank might only agree to deal with the exporter's bank – and only after the exporter provides documentation that the order was filled.

Under this kind of arrangement, the exporting merchant's bank is the drawer and payee of the draft. From there, the exporter's bank may discount the acceptance and give the funds to its customer, allow the exporter to hold it until maturity or have the exporter sell the acceptance in a secondary market transaction.

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