GTRMS Blog
GTRMS Blog
Payment by Acceptance vs. Deferred Payment
What are the core differences between these two payment terms other than (1) in Payment by Acceptance there is a draft & in Deferred Payment there is no draft, and (2) Deferred Payment is used in countries where a high stamp duty is levied on drafts.
MSS
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In both cases, the issuing bank promises to pay on the maturity date established by the tenor, e.g., 90 days after date of shipment. The difference lies in whom they are promising to pay. In the case of the deferred payment, the promise runs to the beneficiary or the bank nominated in the letter of credit to receive documents from the beneficiary and present them to the issuing bank. In the case of the acceptance, the issuing bank undertakes to accept, or cause another bank to accept, a time draft presented by the beneficiary and the promise runs to whomever presents the time draft to the accepting bank at maturity.
The acceptance structure allows the beneficiary to, if they want to, sell the accepted draft to an investor in what is called the "banker's acceptance market." This is a "discount market"--the investors pay some percentage per annum less than the face amount, knowing they will collect the face amount at maturity. The market rate for banker's acceptances ("B/As") is published each day in the Wall Street Journal. This is the rate for $1 million B/As accepted by "prime U.S. banks," and it's generally lower than LIBOR. If you have any B/As you happen to be holding on to and you have any debts at all, it is almost always a good move to sell them and use the money to pay off the debts. You are not expected to look for investors yourself--you can sell them to the same bank you presented your documents to, and they can turn around and sell them on the market. If you don't like that bank’s rate, however, you can ask forf the accepted draft to be returned to you and then take the accepted draft down the street to another bank.
Banker's acceptances are attractive to investors as very safe investments. Not only are they bank obligations but they are covered by negotiable instrument law. Under negotiable instrument law, payment cannot be "stopped," even by court injunction. For this reason, most investors have no problem buying bankers' acceptances without recourse, meaning they take all risks of the acceptances being paid at maturity.
A deferred payment may also be discountable, but only with the bank where documents were presented. Since there is no draft, there is no negotiable instrument and there have been many well-publicized situations where payment was stopped by a court injunction, leaving the bank who discounted the deferred payment with a loss. The current UCP attempts to make it a rule that a deferred payment cannot be enjoined by saying that a bank nominated to incur a deferred payment obligation is authorized by the issuing bank to discount that obligation if requested to do so by the beneficiary. The rationale is that, if the nominated bank was authorized, they should be protected. I'm not a lawyer, but I'm skeptical that every court in the world will buy in to this principle. In the case of bankers' acceptances, they have no choice--every country in the world has a law covering negotiable instruments. Even with this protection, the bank where you presented documents may not be willing to discount your deferred payments and you don't have a piece of paper you can take down the street to try to sell to anyone else.
If you have no intention of discounting--all you plan to do is wait until the maturity date and receive your payment--the two are pretty much comparable. In this case, the big difference is the fact you have pointed out: some countries impose a stamp tax on acceptances. The number of countries doing this is pretty low and has actually been decreasing, but it can make a big difference if you, or your customer, are in one of them.
January 6, 2011