Define: Acceptance Credit

Acceptance credit refers to a type of financial arrangement where a bank or financial institution guarantees payment to a seller on behalf of a buyer. In this arrangement, the bank acts as an intermediary and assumes the credit risk associated with the buyer’s obligation to pay for goods or services.

Acceptance credit is commonly used in international trade transactions, where the buyer and seller may be located in different countries and face uncertainties related to payment and creditworthiness. The bank’s acceptance of the buyer’s obligation provides assurance to the seller that they will receive payment, even if the buyer fails to fulfil their payment obligation.

To avail acceptance credit, the buyer typically applies to their bank for a letter of credit, which serves as a guarantee of payment. The bank then reviews the buyer’s creditworthiness and, if approved, issues the letter of credit to the seller. Upon presentation of the required documents by the seller, the bank accepts the obligation to pay the seller on behalf of the buyer.

Acceptance credit offers several benefits to both buyers and sellers. For buyers, it provides a means to secure goods or services without immediate payment, allowing them to manage their cash flow more effectively. Sellers, on the other hand, benefit from the assurance of payment provided by the bank, reducing the risk of non-payment and enabling them to expand their customer base.

It is important to note that acceptance credit involves legal obligations and contractual agreements between the buyer, seller, and the bank. The terms and conditions of the acceptance credit arrangement, including the payment terms, documentation requirements, and dispute resolution mechanisms, are typically outlined in a written agreement or contract.

In summary, acceptance credit is a financial arrangement where a bank guarantees payment to a seller on behalf of a buyer. It is commonly used in international trade transactions to mitigate credit risks and provide assurance of payment. The arrangement involves a letter of credit issued by the buyer’s bank, which serves as a guarantee of payment upon presentation of the required documents by the seller.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March 2024.