Chapter 8-Drafts and Acceptances

Such a formal written demand for payment is called a "draft." Drafts 2 Chapter 8: Drafts and Acceptances... The most common versions of drafts are: 1 SIGHT DRAFTS which are payable when

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International Payment 4 th Edition

World Trade Press

Chapter 8:

Drafts and Acceptances

Edward G Hinkelman

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In documentary transactions sellers make a written demand upon either a bank or the buyer to pay for the shipment of goods This demand accompanies the documentation package the seller presents to the bank Such a formal written demand for payment is called a "draft."

Drafts

2 Chapter 8: Drafts and Acceptances

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The formal definition of draft is: An unconditional order in writing, signed by a person (drawer) such as a buyer, and addressed to another person (drawee), typically a bank, ordering the drawee to pay a stated sum of money to yet another person (payee), often the seller, on demand or at

a fixed or determinable future time The most common versions of drafts are:

(1) SIGHT DRAFTS which are payable when presented, and (2) TIME DRAFTS (also called usance drafts) which are

payable at a future fixed (specific) date or determinable (e.g., 30, 60, 90 days) date

Drafts

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An acceptance is a time draft that has been accepted and signed by the drawee (the buyer or the bank) for payment at maturity

If a time draft is accepted by a buyer of merchandise, it is called a TRADE ACCEPTANCE

If a time draft is accepted by a bank it is called a BANKERS' ACCEPTANCE

Acceptances

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In most cases, obviously, a draft accepted by a bank enjoys higher credit standing than a draft accepted by a company or individual, since a bank is presumed to meet its obligation at maturity, and a company or individual in

a foreign country may not as readily comply with its obligation

Acceptances

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In documentary transactions, the seller has two options:

(1) once the seller's time draft is accepted The seller may

either hold it until maturity and collect full face value, or (2) discount the draft, most likely with the accepting bank,

and take the net value in cash immediately

 Trade and bankers' acceptances often represent the

easiest, least expensive way for a seller to provide credit

to a buyer, while enjoying the security provided by the documentary transaction

Holding or Discounting Acceptances

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Foreign buyers may indicate that they wish to provide a time documentary credit (rather than a sight documentary credit) but agree either to allow the seller to

up the sales price slightly so as to offset the acceptance commission and discount costs or to absorb the acceptance commission and discount charges the bank will apply when discounting the draft at the request of the seller

Financing Transactions using Acceptances

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In either case, the buyer and the buyer's bank will absorb the charges involved, and the seller will receive the full contract sales amount

Since the charges are usually lower than conventional financing charges, the buyer is still better off than if financing had been obtained through a bank loan

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A "clean" acceptance is one that does not have any notations attached that would compromise its value

In a trade acceptance the customer promises to pay the bank the full amount of the draft no later than the date of maturity, or upon demand of the bank

The accepted draft, when discounted, becomes a negotiable instrument that can be sold in the acceptance market, which is an over-the-counter market of brokers, dealers, and banks

"Clean" Acceptances

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Bankers acceptances are generally short-term, that is up

to 180 days

Bankers' acceptances become money market instruments once they are accepted by a major bank, which means that the bank has undertaken to honor this short-term note at its maturity

Because of this characteristic, bankers' acceptances often result in a lower financing costs The difference can range from 1 to 3 percent depending on the transaction and the bank involved They are important sources of financing

"Clean" Acceptances (cont.)

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Letter of Credit

Difference between Letter of credit and Drafts

Drafts

Bank issues Letter of

Credit on behalf of the

importer assuring

payment to the exporter

upon presentation of the

shipping documents to

the bank

Draft or Bill of Exchange

is drawn by the exporter instructing the importer to pay face

value of the draft on sight or at certain time

in future

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Drafts

If the documents are in

compliance with the

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presented documents are

fully complied with the

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Drafts

Payment is made to the

exporter only when

shipment is made

Sight draft:

Payment is made on presentation of the draft to the importer

Time draft:

Payment is made by the importer on maturity of the draft

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Drafts

Goods will be available to

the buyer after payment

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End of chapter 8

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