Acceptance Credit

Definition

Acceptance Credit is a financial instrument primarily used in international trade, where a commercial bank or merchant bank extends credit to a foreign importer deemed creditworthy. An acceptance credit is designed to facilitate the sale of goods by enabling exporters to draw bills of exchange against the established credit. Once the bill of exchange is accepted by the bank, it can either be discounted on the money market or allowed to mature. In return for this service, the bank charges the exporter a fee known as the acceptance commission.

Examples

Importer Financing: A U.S. importer wants to purchase machinery from a German exporter. The German exporter requires payment assurance. The U.S. importer arranges an acceptance credit with their bank. The German exporter then draws a bill of exchange against this credit. Once the U.S. bank accepts the bill, the exporter can either discount it to receive immediate payment or hold it until maturity.
Discounting on Money Market: A Hong Kong-based electronics exporter uses acceptance credit for a shipment to an Australian importer. The Hong Kong exporter draws a bill of exchange against the acceptance credit. After acceptance by the Australian importer’s bank, the bill is discounted on the London money market, providing the Hong Kong exporter with immediate cash flow.

Frequently Asked Questions (FAQs)

What is the purpose of acceptance credit? The primary purpose of acceptance credit is to provide a secure and efficient means of financing international trade, ensuring that exporters receive payment and importers guarantee their creditworthiness.
Who can use acceptance credit? Any business engaged in international trade transactions can use acceptance credit, provided the bank considers the importer creditworthy.
What is an acceptance commission? An acceptance commission is a fee charged by the bank for accepting the bill of exchange and extending credit to the importer.
What is the difference between acceptance credit and a letter of credit? While both are used to facilitate international trade, acceptance credit involves the bank accepting a bill of exchange, whereas a letter of credit guarantees payment to the exporter upon fulfilling specific terms.
Can acceptance credit be used for domestic transactions? Acceptance credit is primarily used for international trade transactions but can sometimes be adapted for high-value domestic trade under certain conditions.

Bill of Exchange: A written, unconditional order by one party to another, requiring the receiving party to pay a specified amount of money to a third party at a future date.
Money Market: A segment of the financial market where short-term financial instruments are traded, providing liquidity and funding solutions.
Acceptance Commission: A fee charged by banks for accepting a bill of exchange under acceptance credit terms.

Online References

Suggested Books for Further Studies

“International Trade Finance” by Kwai Wing Luk
“Finance of International Trade” by Eric Bishop
“Global Trade Finance” by Matthew C. Shenkar

Accounting Basics: “Acceptance Credit” Fundamentals Quiz

### What primary purpose does acceptance credit serve in international trade? - [x] To provide a secure means of financing and ensuring payment for goods. - [ ] To negotiate exchange rates between currencies. - [ ] To assess the financial stability of exporters and importers. - [ ] To provide low-interest loans to foreign companies. > **Explanation:** Acceptance credit offers a secure means for financing international trade, ensuring payments to exporters while guaranteeing the importer's creditworthiness. ### What is required from the bank for an acceptance credit? - [ ] An appraisal of the goods. - [x] Acceptance of a bill of exchange. - [ ] A full audit of the exporter's finances. - [ ] A letter of introduction. > **Explanation:** The bank must accept the bill of exchange drawn by the exporter against the acceptance credit established for the importer. ### Who primarily benefits from the acceptance commission fee? - [ ] The importer. - [x] The bank. - [ ] The exporter. - [ ] The customs office. > **Explanation:** The bank charges the acceptance commission fee, compensating for the service of accepting the bill of exchange and extending credit. ### What option does an exporter have once their bill of exchange is accepted? - [ ] Hold it indefinitely. - [ ] Return it to the importer. - [x] Discount it in the money market. - [ ] Convert it to a trade agreement. > **Explanation:** Once accepted, the exporter can choose to discount the bill in the money market or let it run to maturity. ### Which term refers to the fee charged by banks for accepting a bill of exchange under acceptance credit? - [ ] Exchange fee. - [ ] Discount rate. - [ ] Interest rate. - [x] Acceptance commission. > **Explanation:** The fee charged by banks for acceptance credit is known as the acceptance commission. ### Can acceptance credit be adapted for high-value domestic trade? - [x] Yes, under certain conditions. - [ ] No, it is exclusively for international trade. - [ ] Only for perishable goods. - [ ] Only for goods that require immediate payment. > **Explanation:** Although primarily for international trade, acceptance credit can be adapted for high-value domestic transactions under specific conditions. ### Which financial instrument can be discounted in the money market under acceptance credit? - [ ] Promissory note. - [x] Bill of exchange. - [ ] Mortgage deed. - [ ] Purchase order. > **Explanation:** Under acceptance credit, the bill of exchange accepted by the bank can be discounted in the money market. ### How does acceptance credit enhance the cash flow of an exporter? - [ ] By reducing taxation. - [x] By providing immediate cash through discounting. - [ ] By waiving transaction fees. - [ ] By securing a higher sales price. > **Explanation:** Acceptance credit enhances the cash flow of an exporter by allowing the bill of exchange to be discounted, thereby providing immediate funds. ### Who primarily assesses the creditworthiness of the importer in an acceptance credit transaction? - [ ] Exporter's government. - [x] Importer's bank. - [ ] Insurance company. - [ ] Trade association. > **Explanation:** The importer's bank assesses their creditworthiness before establishing an acceptance credit. ### What distinguishes acceptance credit from a letter of credit? - [ ] Terms of interest. - [ ] Government endorsement. - [x] Involvement of a bill of exchange vs. payment guarantee. - [ ] Length of contract. > **Explanation:** Acceptance credit involves the acceptance of a bill of exchange, while a letter of credit guarantees payment to the exporter upon meeting specified terms.

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