How to Understand Banker Acceptances

There are many different financial alternatives available to investors in Canada. Wondering which one to opt for and understanding how they work is part of the process. You need to seek advice on which ones will best suit your capital requirements.

Financial options offered range from an RRSP limit which relates to registered retirement savings plans to flow through shares which are now proving popular with many seeking investments in the Canadian commodities markets. One of the options that have been growing rapidly is called banker acceptances. These are written agreements that act as promises between the bank and the customer for the bank to pay a certain amount of money to the person who is named on the banker’s draft. They are the liability of the bank once signed and accepted by the customer and bank in question.

These acceptances are negotiable and flexible. They are often used by traders in circumstances of international trade. The drawer of the acceptance creates an agreement with their bank to pay a specific value of money to the bearer of the acceptance on the date written down and agreed on the legal document. The whole process means that traders can make good use of the credit rating of their bank rather than having to rely on their own credit rating in business. This is why the agreement is completely the liability of the bank in question.

Using one of these acceptances normally relies on the reputation of the bank and its standing within the financial community as a whole. Basically, if the bank that you are using has a good reputation and high standing in the financial world then you are more likely to get creditors to approve an acceptance. This is normally a short-term agreement.

To make the best use of an acceptance such as this from a bank, the buyer has to be able to meet certain requirements set forward by the bank they are dealing directly with. The buyer is really asking the bank for finance rather than going to creditors directly to ask for a loan. Therefore the bank must be sure that they are giving the money to the right person. Some of the requirements needed as proof of character are laid out by national financial regulations, while others are by the bank itself.

Some of the major advantages of getting an acceptance document from the bank are that when you use this you will not have to use your own credit rating but can use the bank’s name instead. Of course, for the creditor in question there is some risk involved as they must ensure that the customer and bank are both reliable and trustworthy. The seller will get the acceptance up front. A bank will not offer an acceptance without a good reason. The creditor needs to be financially secure and trustworthy with a good reason for requesting the acceptance.

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This entry was posted on Friday, March 4th, 2011 at 3:28 pm and is filed under Banking/Finance, General. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.