[ad_1]
Acceptance credit is a type of letter of credit used in international trade. It creates a bank account funded based on the buyer’s creditworthiness, allowing the seller to draw on the balance up to the credit line. Risks include the buyer’s inability to honor the debt or lost/delayed shipments. Confirmed acceptance credit is more expensive but allows the seller to waive responsibility for the shipment.
An acceptance credit is a form of letter of credit. This particular type is often used in situations involving an international trading relationship between a buyer and a seller. Sometimes referred to as acceptance financing, this arrangement allows for the creation of a bank account known as an acceptance line of credit which is then funded based on the buyer’s creditworthiness. As part of the arrangement, the seller is obligated to pay the acceptance credit within a certain period of time. In the meantime, the seller can draw on the balance of this account up to the amount of the credit line.
Recourse to acceptance credit is very widespread when the buyer and seller have established an employment relationship over the years. Both benefit from the arrangement, with the seller able to use the proceeds of the sale before payment is actually offered. At the same time, the buyer is given a window of time to pay off the debt in full, a factor that can be particularly important if the plan is to resell the imported goods at a profit shortly after they are received.
There are some risks associated with the use of acceptance credit. This is especially true if the debt instrument is unconfirmed. In this scenario, the seller assumes the risk that the buyer may be unable or unwilling to honor the debt, due to circumstances such as a delay in shipment, confiscation of the shipment by customs authorities or any other issue which cause the buyer to lose the opportunity to resell the goods as previously provided. At the same time, a confirmed acceptance credit could pose a problem for the buyer if shipments are lost or delayed, as the bank issuing the credit guarantees the debit instrument and will eventually ask the buyer to service the debt, regardless from what may have happened with the shipment.
It is important to note that confirmed acceptance credit is a more expensive arrangement than unconfirmed acceptance credit. Sellers who request the former often allow for the difference in calculating the purchase price, effectively offsetting the amount. Since this approach also allows the seller to waive responsibility for the shipment once it has been delivered to a shipper, a confirmed acceptance leaves the issue of lost shipments between the buyer and the shipping company, since the seller has fulfilled its liability in the transaction.
Smart Asset.
[ad_2]