a financial instruction used to make payments in the international trade for the sale of goods.
Details of Acceptance Market
An acceptance market is an agreement in form of a contract that involves the use of a short-term credit as payment in international trade i.e a bill of exchange collected in the place of the payment for goods and services. Here is a brief overview of the parties involved and the role they play.
- Importers - these are foreign buyers that goods and services produced by other countries into a country for sale.
- Exporters - are individuals who the goods and services of a country to another for sale.
- Financial Institutions- It is a company in charge of the business of dealing with financial and monetary transactions which include deposits, loans, investments, currency exchange, etc.
- Investors - these are people or organizations that invest their money into financial schemes with the expectation and aim of achieving a profit.
The acceptance market is often used by importers and exporters and guaranteed by a financial institution. The credit instrument usually has a date on which the principal amount of either a note, acceptance bond, draft, or any other debt instrument becomes due. This date is called maturity date and it specifies the time in which the buyer is expected to fulfill their obligation.
Import and Export
Let's take a closer look at the two parties — importers and exporters. The exporter first sends the importer an acceptance bill, the importer appends their signature confirming their commitment to making good on their payment for the bought goods at a stipulated date.
After signing, the importer takes back the bill to the exporter who sells it to a financial institution at a discount. The exporter receives payment even though the importer does not have to settle payment until the goods arrive, the importer can obtain physical possession before payment and also has time to sell the goods of which the proceeds will be used to settle debts.
Acceptance Market Example
Let's say that Mr. Smith is an exporter and he has a particular good. Smith found a buyer, or importer, named Mr. Rasak. Smith is expected to first send an acceptance to Rasak.
Rasak is then expected to sign the acceptance, declaring that he is willing to pay the stipulated costs. He then sends back the acceptance to Smith who can take it to his financial institution to cash it. Rasak then has until the payment date to sell the goods so that he has the capital to pay the exporter on the agreed-upon date.
Significance of Acceptance Market
The acceptance market is useful to all the parties involved i.e the importers, exporters, and financial institutions. The exporters receive the payment for their goods immediately while the importers are not under compulsion to pay until the possession of the goods or services in question.
The financial institution profits or gains from the acceptances at the spread (difference between two prices or rates) that occurs between the negotiating and the rediscounting rate. It also provides investors with a means of employing temporarily excess funds for short periods with a minimum risk.
Types of Acceptance Market
One example of the acceptance market is the banker’s acceptance. The banker’s acceptance is a negotiable piece of paper that plays the role of a post-dated check where the bank guarantees the payment of the money owned instead of an account holder.
It requires the bank to pay the holder of the account a certain amount of money on a particular date. The banker’s acceptance is a safe form of payment for both parties involved in the transaction. It's safe because the money owned is guaranteed to be paid on the date specified on the bill.
An acceptance market often requires a document that will serve as a backing or proof of the deal. It might include bills of lading, invoices, and showcasing the physical goods that are being sold.