Banker's acceptances

A banker’s acceptance helps facilitate trade between international companies by reducing payment risk for both sides. Suppose an American importer wants to buy $50 million of TVs from a Chinese exporter. The exporter will usually want assurance of payment before shipping, since shipping costs are significant. At the same time, the importer may not want to pay before the TVs arrive. A banker’s acceptance helps bridge this timing gap.

A bank can act as an intermediary between the exporter and the importer. In this example, the American importer sends the $50 million to the bank when the deal is agreed upon. The bank then issues a post-dated check to the Chinese exporter that becomes payable on the day the TVs are delivered. The exporter can either:

• Hold the check and wait to receive payment on the delivery date, or
• Sell the check in the market at a slight discount to $50 million to get cash sooner

The post-dated check that the exporter can sell in the market is the banker’s acceptance. Banker’s acceptances are short-term investments that investors use to earn a quick, generally safe return. They’re considered money markets because of their short-term nature. To avoid SEC registration, banker’s acceptances are always issued with 270 days or less until maturity.