Acceptance Market: Everything You Need to Know
In the acceptance market, acceptances are sold to third parties at a steep discount according to published acceptance rates.3 min read
In the acceptance market, acceptances are sold to third parties at a steep discount according to published acceptance rates. In particular, the acceptance market is an important industry for the following groups:
- Exporters, who can be paid immediately for their goods.
- Importers, who don't need to pay until they take possession of the goods.
- Financial institutions, who can earn a profit from the various negotiating and rediscounting rates.
- Investors and dealers, who can trade acceptances in a secondary market.
While an exporter might be able to make more money selling their items on their own, the acceptance market lets them get paid faster because it is based on instant credit tools.
What Are Acceptances?
An acceptance is a time draft or bill of exchange that can be used to pay for certain items. One of the most common examples of an acceptance is a banker's acceptance, which is a time draft drawn on and accepted by banks as a method of short-term financing. They are most commonly used in international trade.
An acceptance will include a written order that requires the buyer to pay the seller a specific sum on a specific date.
Here's an example to understand how acceptances work on the acceptance market. An exporter will send an acceptance to the buyer of his goods. The buyer signs the acceptance, indicating she is willing to pay the costs. Then, when the exporter receives the acceptance back, he can send the acceptance to his bank to cash out on it. The buyer will have until the payment date to sell the goods so she has the capital to pay for them.
This type of transaction is also called a self-liquidating transaction. Because of its success, acceptances are an accepted means of credit in many countries.
More on Banker's Acceptance
The main use of a banker's acceptance is for companies wishing to make big purchases overseas. This process is easier than trying to send payment directly to the buyer, as the bank handles both sides of the transaction. The importer contacts the bank to set up a time draft to pay the exporter on a specific date. Much like a post-dated check, the bank will pay the exporting party the specified amount at a later date.
Banker's acceptances require a backing document as proof of the transaction. This might include:
- Bills of lading.
- Presenting the physical goods being purchased.
Once the buyer presents proof of purchase, the bank stamps "accepted" on the document. This is actually how acceptances got their name.
So why would an exporter and importer turn to a bank to regulate their trade? Overall, it helps both sides feel more comfortable, especially if they don't have a lot of history with each other. Having a banker's acceptance legally obligates each party, reducing the chance of a lost investment.
Additionally, banker's acceptances are good for importers who can't get other types of financing for their purchases. In many cases, banker's acceptances can be the least expensive option. Best of all, importers have enough time to sell the products before having to repay the debt.
Selling Banker's Acceptances
Much like other types of loans, banker's acceptances can also be bought and sold on the secondary market. The current market for banker's acceptances is quite strong, giving bankers a lot of flexibility when making these deals.
They can easily sell the banker's acceptance to a third party to recoup their investment. Meanwhile, the investor has a safe, short-term investment they can collect on when the importer sells their goods.
Understanding Market Acceptance
A similarly-named but distinct topic is market acceptance, which is whether or not your client base is satisfied with your current product. The rate of market acceptance determines whether or not you should increase or decrease a product's production. It also lets you know if your campaign has been a failure or success.
To achieve minimum market acceptance, you'll need to provide a solution to a set of problems that your customers are willing to pay for. The more customers you can convince to purchase this product, the greater the market acceptance.
To know for sure if their product will have good market acceptance, most companies perform a market acceptance test before the product release.
If you need help with the acceptance market, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.