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What is an Acceptance Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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An acceptance credit is one form of a letter of credit. This particular type is often used in situations involving international trade relations 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 credit facility that is then funded based on the credit-worthiness of the buyer. As part of the provision, the seller is obligated to pay off the acceptance credit within a specified period of time. In the interim, the seller is able to draw on the balance of this account, up to the amount of the credit line.

The use of the acceptance credit is very common when the buyer and seller have established a working relationship over the years. Both benefit from the arrangement, with the seller able to make use of the proceeds from the sale before payment is actually tendered. At the same time, the buyer is provided with a window of time to settle the debt in full, a factor that can be especially important if the plan is to resell the imported goods at a profit shortly after they are received.

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There are some risks associated with the use of acceptance credit. This is especially true if the debt instrument is not confirmed. In this scenario, the seller is taking on the risk that the buyer may not be able or willing to honor the debt, due to circumstances such as a shipping delay, confiscation of the shipment by customs authorities, or any other issue that causes the buyer to miss opportunities to resell the goods as previously anticipated. At the same time, a confirmed acceptance credit could present a problem for the buyer if shipments are lost or delayed, since the bank issuing the credit guarantees the debt instrument and will eventually demand that the buyer honor the debt, regardless of what may have occurred with the shipment.

It is important to note that confirmed acceptance credit is a more expensive arrangement than unconfirmed acceptance credit. Sellers requiring the former will often allow for the difference when calculating the purchase price, effectively offsetting the amount. Since this approach also allows the seller to relinquish responsibility for the shipment once it is 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 his or her responsibilities in the transaction.

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Discuss this Article

JaneAir
Post 2

@indemnifyme - Insurance is the answer to a lot of life's problems, isn't it? That is, if you can get the company to actually pay your claim!

All jokes aside though, this arrangement sounds like it could be pretty beneficial. Since the buyer may also be making a profit off the goods, it makes sense to have a sort of "grace period" in paying for them.

I think it's also good there is a third party involved. I imagine there would be more consequences when defaulting on something like this to a bank then just a business to business agreement.

indemnifyme
Post 1

I can see how a shipment getting lost or damaged in transit would be a big problem with this type of arrangement. However, there is insurance available for this!

Certain types of commercial policies will cover goods in transit. All business should have some type of business insurance to cover exposures such as goods being shipped and their liability.

I guess what I'm saying is that if both companies are properly insured, they can rest a little easier when they enter in a deal using acceptance credit.

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