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Trade Acceptance
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

A bill of exchange drawn by the seller (drawer) on the purchaser of goods sold and accepted by such purchaser (drawee); as defined by the Board of Governors of the Federal Reserve System, "a bill of exchange drawn to order, having a definite maturity and payable in dollars in the United States, the obligation to pay which has been accepted by an acknowledgement, written or stamped, and signed across the face of the instrument by the company, firm, corporation, or person upon whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity, according to its tenor, such draft of bill without qualifying conditions."

In order to be eligible for a rediscount, a trade acceptance "must bear on its face or be accompanied by evidence in form satisfactory to the Federal Reserve Bank that it was drawn by the seller of the goods on the purchaser of such goods.  Such evidence may consist of a certificate on or accompanying the acceptance, to the following effect:  THE OBLIGATION OF THE ACCEPTOR OF THIS BILL ARISES OUT OF THE PURCHASE OF GOODS FROM THE DRAWER.  Such certificate may be accepted by the Federal Reserve Bank as sufficient evidence; provided, however, that the Federal Reserve Bank, in its discretion, may inquire into the exact nature of the transaction underlying the acceptance."

Although use of the trade acceptance has been widespread in Europe for many years, its use has only partially supplanted the use of the check in this country.  One of the aims of the Federal Reserve Act was to encourage the use of the acceptance in the United States .  The purpose of the American Acceptance Council was to maintain an intensive campaign to foster the trade acceptance in U.S. business.  The movement was also approved by the National Association of Credit Management, which stated, "Trade acceptances present conveniences and economies which should appeal to the encouragement and support of commercial credit grantors.  The trade acceptance system would eliminate certain serious evils which have developed with the increase of commercial credits on an open account system, and of which unearned discounts, the abuse of sales terms, and the assignment of accounts receivable are the more prominent."

The procedure in trade acceptance practice is as follows.  The seller of merchandise upon making shipment forwards with the shipping documents an acceptance form (in reality a time draft).  This form is often sent in duplicate to enable the buyer to retain a copy for his files.  If the goods are subject to cash discount, the buyer may avail himself of this opportunity by remitting immediately; otherwise the buyer is expected to sign the acceptance form by writing his name across the face of the instrument, indicating the date, and designating the bank where it is payable.  In the great majority of cases, an acceptance is payable at the drawee's (acceptor's) bank.  It may be made payable at any bank or trust company in the United States. It is then returned to the drawer (seller).

The Uniform Commercial Code (1962 official text), as presented to the states for their adoption, provided in Alternative A of Section 3-121 that a note or acceptance which states that it is payable at a bank is the equivalent of a draft drawn on the bank payable when it falls due out of any funds of the maker or acceptor in current account or otherwise available for such payment.  If the particular state has adopted this alternative provision, when a trade acceptance is made payable at the acceptor's bank, it may be presented for payment and collected through banking channels in the same manner as a check.  On the other hand, Alternative B of Section 3-121 does not so provide.

But there are many other advantages accruing to both buyers and sellers in the use of the trade acceptance.  The advantages to the seller are as follows:

 1.  It completes the transaction by joining the evidence of the debt and means of payment with  the shipment or invoice.

 2.  It compels definite payment at maturity.  The seller has the buyer's negotiable promise that at a specified time and place the buyer will pay for the goods purchased from the seller.

 3.  It makes definite calculations possible, since sellers know in advance at what times their sales will become available as cash.

 4.  It prevents tying up capital in open book accounts.

 5.  It provides additional credit facilities.  Trade acceptances can be discounted at 100% of their face value, while accounts receivable cannot be discounted even under the most favorable conditions for more than 95%.  Furthermore, there is no limit to the amount of acceptance paper which a bank may take from one customer, since the 10% limitation (applying to national banks and to state banks in many states) does not apply.

 6.  It reduces collection expenses and petty annoyances.

 7.  It avoids making the seller perform banking functions.

 8.  It tends to prevent the cancellation of orders and the return of goods.

 9.  It increases the liquidity of the seller's assets.

10. It permits a lower discount rate.  Trade acceptances command a preferential rate of interest, since they afford double security to the lending bank.  Recognition of the superior security in the trade acceptance is demonstrated by the fact that the Federal Reserve rate of rediscount for this class of paper is usually the prime rate.

11. It promotes economy through the lower rate of discount and through the reduction of the cost of extending credit, losses on bad accounts, etc.

Many of the advantages to the seller also accrue to the buyer.  In addition, the acceptance benefits the buyer in the following ways:

1.   It strengthens his credit.  In giving a trade acceptance, the buyer proves his good faith by binding himself to pay an honest debt in full when it becomes due.  He assumes no obligation until after the seller has surrendered title to the merchandise.  In other words, it brings the transaction out into the open and places the buyer on a merit basis.

2.   It tends to develop careful buying.  The purchaser will not overbuy when he realizes that the debt must be met at a definite maturity.

3.   It reduces expenses of handling open accounts.

4.   Acceptance buyers are preferred by sellers.

The use of the trade acceptance also benefits the banker in the following ways:

1.   It tends to better the character of the bank's assets, since trade acceptances are two-name paper and are readily re-discountable.

2.   It promotes a keener sense of responsibility in business.

3.   It increases the amount of discounting business to be done.

4.   It increases the amount that can be loaned to one borrower.

5.   It makes possible a fuller utilization of commercial credit.

6.   It prevents the secret assignment of open book accounts.

A trade acceptance must always represent a completed merchandise transaction and cannot be used as a means to enforce payment of debts past due or as an evidence of a loan, i.e., it is to be based solely in connection with a current merchandise transaction.  Federal Reserve banks may rediscount trade acceptances or purchase them in the ope4n market, provided they conform to the eligibility requirements.  The Board of Governors of the Federal Reserve System has provided by regulation, "The Federal Reserve Bank shall take such steps as it deems necessary to satisfy itself as to the eligibility of the trade acceptance offered for rediscount and may require a recent financial statement of one or more parties to the instrument.  The trade acceptance should be drawn so as to evidence the character of the underlying transaction, but if it is not so drawn, evidence of eligibility may consist of a stamp or certificate affixed by the acceptor or drawer in a form certificate to the Federal Reserve Bank. 

Despite united efforts to promote the use of the trade acceptance, it has not caught on as a popular business practice, except perhaps as a means of making liquid accounts inclined to be slow on collections.

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