CHAPTER 8
Drafts and Acceptances 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.”
IN DOCUMENTARY TRANSACTIONS
DRAFTS
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. ACCEPTANCES
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 T R A D E A C C E P T A N C E . If a time draft is accepted by a bank it is called a B A N K E R S ’ A C C E P T A N C E . 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. HOLDING OR DISCOUNTING ACCEPTANCES
In documentary transactions, the seller has two options, once the seller’s time draft is accepted. The seller may either hold it until maturity and collect full face value, or discount the draft, most likely with the accepting bank, and take the net value in cash immediately. In these ways, 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. FINANCING TRANSACTIONS USING ACCEPTANCES
Thus, 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. 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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