What Is a Bank Endorsement?

A bank endorsement is a guarantee by a bank confirming that it will uphold a check or other negotiable instrument, such as a banker's acceptance, from one of its customers. This assures any third-party that the bank will back the obligations of the creator of the instrument in the event the creator cannot make payment.

Key Takeaways

  • Bank endorsements are guarantees from a bank that ensure it will uphold the commitments of its client.
  • Common bank endorsements include banker's acceptances and letters of credit.
  • A banker's acceptance works as a time draft, specifying payment at a future date. Letters of credit guarantee payment and come in different forms.
  • These types of guarantees make international trade between parties easier, particularly when they are unknown to one another.
  • Some bank endorsements also remove the need for financing a payment.

Understanding a Bank Endorsement

Bank endorsements are common in international trade, where the business parties are typically unknown to one another. Banks stand in the middle by assuring good funds to the recipient. A bank endorsement, in the case of a banker's acceptance, for example, is the equivalent of a guarantee. A banking institution will generally not provide a banker’s acceptance without a reasonable likelihood that it will be able to provide the funds as specified.

Types of Bank Endorsements

As noted above, bank endorsements accompany specific negotiable instruments. Negotiable instruments, including bills of exchange, promissory notes, drafts, and certificates of deposit, represent payment promises to a specified person (the assignee). Checks are common forms of negotiable instruments but the most common types of bank endorsements are a banker's acceptance, also known as a time draft, and a letter of credit.

Bankers Acceptances

A banker's acceptance is short-term debt. It is an instrument from a bank that promises to pay the holder a specified amount at a specified date, usually between 30 to 180 days. A company issues a banker's acceptance, which a commercial bank guarantees. Certain documents are required before a bank guarantees a bankers acceptance. Documents can include a bill of lading and an invoice.

The company generating the banker's acceptance in this case would typically be an importer in a transaction where they are concerned about sending out money before receiving goods. Similarly, the importer would need a banker's acceptance to make the exporter comfortable that they will be paid.

In this instance, the exporter would receive the bankers acceptance and be allowed to cash the money in at a future date. The importer would need to pay the bank back before the maturity date. Due to the perceived safety of banker's acceptances, these instruments commonly facilitate international institutions to complete transactions; at times, banker's acceptances can eliminate the need to extend credit.

For example, an American wine importing business may issue a banker’s acceptance with a date beyond when the South African wine cases are expected to be delivered. This allows the South African exporting business to have a payment instrument in hand prior to finalizing a shipment, which can help smooth any obstacles within such an international deal, including any disparate regulations, language barriers, and/or variances in infrastructure.

Letters of Credit

A letter of credit is similar to a banker's acceptance in that a bank will guarantee an exporter payment for goods or services in the event that payment for the goods or services are not made on time or for the right amount. A letter of credit does not work on a time draft function like a banker's acceptance. There are many different types of letters of credit, including commercial letters of credit, standby letters of credit, and revolving letters of credit.