What is a Banker’s Acceptance?

A banker’s acceptance is a type of money market tool which can be traded between different financial entities. They are essentially a way for people to work together, especially internationally, when it’s not possible to determine each importing or exporting companies’ creditworthiness. So what’s used instead is the creditworthiness of a bank intermediary.

Banker’s Acceptance Definition

Here’s how it works: A customer of the bank will ask the bank to make a payment in the near future, usually in about six months. When the bank agrees to this order, it is now liable for that payment. Once the bank has signed off on the order, it can then be traded in the world financial markets, hence the name, a “banker’s acceptance”. People in the financial industry like bankers’ acceptances because they are considered very safe assets. This is also why they’re so popular in terms of international trade and finance, because it’s not easy to verify the solvency and standing of the corporate or financial entity you’re dealing with. After all, there’s only so much information a trader in Los Angeles can glean about a trader in Pakistan or Austria.

Example of a Banker’s Acceptance

Let’s say, for example, you own a furniture company in Miami. You want to buy five very expensive sofas from a furniture manufacturer in Sweden. However, you don’t have the cash to buy the sofas and since you’ve never worked with the manufacturer before you haven’t established any credit with them. You do, however, have a great credit record with your bank. So, you go to your bank and ask them to front you the cash for the sofas. The minute the bank accepts your request, it is now liable to pay for the sofas, which makes the manufacturer in Sweden happy because they now know that the bank will pay for the sofas. So off they go to your showroom to be sold by you. As with all money market instruments and other questions concerning how, when, and where to invest your money, be sure to sit down with a qualified financial services expert and ask him or her all the questions you have on your mind before committing to an investment.

Photo Credit: Sudan Envoy