What is a Two Name Paper
A two name paper is a nickname assigned to a legal agreement for the purposes of a trade paper acceptance. Both trade acceptances and banker's acceptances can be called a two name paper. In order to bear this name, these instruments must carry two signatures, one for the drawer of the paper and one for the endorser of the paper, typically an accepter and a banker. Because two signatures are required, a two name paper is also sometimes referred to as a double-name paper.
BREAKING DOWN Two Name Paper
A two name paper is most commonly used as a commercial paper in the US as a means of short-term financing for a trade acceptance. Trade acceptances are made on draft-negotiable instruments and are generally a promise to pay by a finance company, not a bank. They are futures payable contracts, when one party agrees to pay another party at a date in the future as an exchange for goods.
A trade acceptance occurs with a draft and acceptance on a legal document, sometimes referred to as a time draft. The document details the drawee to issue funds to the drawer and stipulates when the funds guaranteed will be paid back, along with any payback stipulations. When a trade acceptance occurs with a draft that has both the issuer and the receiver’s signatures on it, it is considered a two name paper. Two name papers for trade acceptances are different than typical loaning agreements because they are generally drawn up on behalf of the seller, not the receiver. The two name paper stipulates that the seller will be paid back. If a note is drawn up by the buyer, it is typically called a promissory note, when the buyer is taking out a loan and promising to give it back.
The signatures for a two name paper can be either as endorser or drawer. If the issuer of one of these instruments cannot pay the acceptance, then the endorsing bank becomes responsible for its payment and is liable for the agreed-upon amount.
Pros and Cons of a Two Name Paper
A two name paper can provide a time-efficient and relatively straightforward method of financing for a trade paper acceptance. However, the risk of a two name paper falls primarily on the issuer, as they are responsible for the agreement amount. It may also be more difficult to recover any defaulted funds if the drawer has insufficient funding to pay back the amount.