Banker's acceptances

A banker’s acceptance helps facilitate trade between international companies. Assume an American importer is looking to purchase $50 million of TVs from a Chinese exporter. The Chinese exporter will probably want some assurance of payment before the TVs are delivered as there are significant shipping costs for the TVs. However, the American importer may be hesitant to pay for the TVs before they’ve been delivered. Banker’s acceptances can help fix this issue.

A bank can act as an intermediary between the exporter and the importer. In our example, the American importer would send the $50 million to the bank when the deal is agreed upon. The bank will then send a post-dated check to the Chinese exporter that becomes payable on the day the TVs are delivered. The Chinese exporter can either wait until the TVs are delivered, or can sell the check in the market at a slight discount to the $50 million. By doing so, they can gain access to the money earlier than the delivery date.

The post-dated check that the exporter has the option of selling in the market is a banker’s acceptance. Banker’s acceptances are short-term investments that investors utilize to make a quick, generally safe return. They are 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.