Acceptance credit emerged as a key tool in international trade, helping bridge trust gaps between buyers and sellers. Primarily used for large cross-border transactions, it guarantees that the seller will be paid once all terms are met. This type of credit allows sellers to issue a bill of exchange for future payment. The bank then accepts the bill, ensuring payment at maturity. It reduces risk and facilitates smoother trade. This option allows exporters to receive payment across different regions with varying regulations and currencies.
Acceptance credit is a type of letter of credit (LC) widely used in international trade. It guarantees payment to the seller once specific terms are met. This offers reassurance in case of cross-border transactions. With this credit, you can draw a bill of exchange for future payment. When the bank accepts this bill, it confirms payment at maturity. This could provide a sense of security regarding your finances. In India, as per the Indian Contract Act, 1872, once a bill of exchange is accepted by the buyer (importer), they become legally obligated to pay at maturity.
Here are the steps to follow to apply for an acceptance credit:
Submit a Request
Contact a bank that offers these services, expressing your interest. Provide your business and transaction details to initiate the process.
Provide Documentation
Submit documents like the purchase order, financial statements, and transaction details, as requested
Review the Terms and Conditions
Check the credit amount, duration, fees, and other terms of the acceptance credit before signing any agreement
Issuance of Acceptance Credit
Once approved, the bank issues acceptance credit, guaranteeing payment upon specific conditions
Present Bills of Exchange
After receiving goods, submit bills of exchange to the bank, which confirms payment at maturity
Be sure to fulfil all conditions of the acceptance credit to avoid any penalty. In case of any queries or issues immediately reach out to the bank.
Majorly, there are two main types of acceptance credit, which are as follows:
Confirmed Acceptance Credit
Confirmed acceptance credit provides added security, as the issuing bank guarantees payment. This assurance is given once the seller meets all terms. This type is more expensive than unconfirmed acceptance credit, as the bank guarantees payment. The higher cost covers the bank's responsibility in case of any issues. It eliminates the risk of non-delivery for the seller as they are paid once the goods are shipped. However, the buyer cannot prevent payment, even if issues occur after the goods have been shipped.
Unconfirmed Acceptance Credit
With unconfirmed acceptance credit, the buyer bears the risk if payment issues arise. This means the buyer may face non-payment due to shipment delays, customs confiscation, or non-delivery. In this type, the bank does not provide a guarantee, so the seller is exposed to potential payment risks. The cost associated with this type of acceptance credit is lower than that of a confirmed acceptance credit.
Here are some advantages of getting an acceptance credit:
Guaranteed Payment
Acceptance credit ensures that exporters receive payment once all transaction terms are fulfilled. This security is crucial in international markets, where payment risks are higher. It helps when trust with new buyers is not yet established.
Risk Mitigation
Involving banks in the transaction reduces non-payment risks. By accepting the bill of exchange, the bank guarantees payment to exporters. This ensures compensation, regardless of the buyer’s financial situation.
Flexible Payment Terms
Acceptance credit offers flexibility in payment arrangements. Exporters and buyers can negotiate terms that suit both parties' needs. This gives buyers time to pay and manage cash flow after receiving goods.
Improved Cash Flow for Exporters
Exporters can discount the accepted bills with their banks before maturity. This allows immediate access of funds when required. It is especially useful for businesses that need immediate cash flow. This helps them maintain operations while waiting for buyer payments.
Facilitates Trade with Unfamiliar Partners
Acceptance credit enables exporters to confidently trade with new or distant buyers. The bank’s involvement adds credibility, easing cross-border transactions. This support helps navigate various regulatory environments.
Documentation Support
Acceptance credit requires detailed documentation, clarifying transaction terms for all parties. This documentation acts as a reference in disputes, safeguarding the interests of both buyer and seller.
