(1) Q. What is meant by the trade acceptance system?

A. By the trade acceptance system is meant the substitution of time drafts drawn by the seller on the buyer of merchandise at the time of sale, for the present system of "open book accounts."

(a) Q. What is a trade acceptance?

A. A trade acceptance is a negotiable certificate of indebtedness arising out of a current transaction in merchandise, having a certain maturity, drawn by a seller on a buyer, for a fixed or determinable sum of money, representing the purchase price of goods. A trade acceptance is payable to order and bears across its face the unqualified and unconditional acceptance of the buyer.

(3) Q- What is the purpose of the trade acceptance?

A. The primary purpose of the trade acceptance is to express a credit obligation arising from the sale of goods.

(4) Q. What is the general advantage of the trade acceptance?

A. It makes possible a fuller utilization of the commercial credit of the country than is possible under existing methods.

(5) Q. What is the distinction between the trade acceptance and the promissory note?

A. The trade acceptance is confined to transactions involving the sale of goods. The promissory note may cover practically any kind of obligation.

(6) Q. What is the distinction between the trade acceptance and the draft?

A. The trade acceptance is confined to credit obligations arising from the sale of goods and must have a definite maturity. A draft may cover various kinds of transactions, may be payable on demand or at sight or at the end of a stated time. (For forms of trade acceptances in use, see Part IV).

(7) Q. What is objectionable to the "open book account" system?

A. (a) It provides an easy method for the abuse of credit by buyers who allow their accounts to remain unpaid for unreasonable periods, without payment of interest.

(b) Assets in the form of "book accounts" remain illiquid, and are, therefore, not a good basis for credit.

(c) The "open book account" system interferes with the sale of goods, in that it creates the possibility of an argument on the subject of the credit period.

(d) It unnessarily ties up an unreasonable amount of the value of the merchandise involved.

(e) It ties up the seller's capital without a stated compensation to him.

(f) It necessitates costly collections, extensions of time in payment, trade discounts and abuse of sales terms.

(g) It forces the seller to perform a banking function for the buyer, (h) It tends to raise prices, this being the only way in which the seller can protect himself against the burdens forced upon him.

(8) Q. Name the chief objections to single name paper?

A. (a) It is not usually as strong as two name paper, because, in the latter case, two parties instead of one are responsible.

(b) It is not so readily negotiable as the trade acceptance and is not conceded so favorable a rediscount rate.

(9) Q. What are the disadvantages of "single name" paper in the hands of the banker?

A. All national banks and many State banks are strictly limited by law as to the amount of loans they may make to any one borrower. This restriction does not exist in the case of the discount of "two name paper" representing a current business transaction, such as trade acceptances. The limitations applied to single name paper are required by prudent banking, but where there are obligations of many different buyers with the indorsement of the seller, such limitation is not essential or desirable.

(9) Q. May the trade acceptance be used for any purpose other than to express a credit obligation arising from the sale of goods?

A. This may be answered in the negative.

On the above question, authorities are in substantial agreement that efforts to employ the trade acceptance for any other purpose is certain to cause confusion concerning the value of the trade acceptance.

(10) Q. Describe the business practice involved in a merchandise transaction in which the trade acceptance is used.

A. First, by a consummation of the bargain between the seller and the buyer of goods, a definite amount due, with a definite term of payment is agreed upon.

Second, the seller then draws an acceptance on the buyer and presents it to the latter.

Third, if the buyer is willing to assume that title to the goods has passed to him, that the conditions of the sale have been complied with and that the drawing of the acceptance upon him is in proper form, he may accept by writing across the face of the instrument the word "accepted," with the date, place of payment and his name following, and return this acceptance to the seller or to the bank presenting it.

Fourth, the seller may either hold the acceptance until maturity or may arrange to have it negotiated. The seller may also have the acceptance discounted with a bank, thereby obtaining available funds and preventing a tie-up of his capital.

Fifth, when the acceptance matures, the acceptor may either pay it or may secure an extension of time. This may be accomplished by treating the acceptance as a past due obligation and covering it by a promissory note. However, in cases like these, a prior understanding on the part of both buyer and seller is necessary.

Sixth, if the acceptance has been discounted at a bank, the bank may have the acceptance rediscounted with its Federal Reserve Bank, thereby being assured of liquidity in its investments.

(11) Q. What are the advantages of the trade acceptance in the hands of the banker?

A. The legitimate acceptance of the successful dealer, discounted by the seller at his bank, is the most liquid kind of paper obtainable. In the event of any sudden withdrawal of deposits, or any unforeseen stringency, such paper in the hands of the banker is immediately available to meet such withdrawals, or may be used to acquire additional loans by the process of rediscounting.

Single name paper, however, has been regarded heretofore as undesirable for rediscount, and lending banks have usually required the direct obligations of borrowing banks which the latter were adverse to giving, since the appearance of "bills payable" in a bank's statement has for a long time been looked upon by the public as elements of weakness; the lending powers of banks were necessarily limited, by reason of the necessity of holding the notes of their borrowers until paid.

(12) Q. (a) Why should a seller prefer a trade acceptance, instead of a note, from the buyer?

(b) Why should a buyer who can purchase on "open book account" on liberal terms give an acceptance ?

A. (a) The trade acceptance is, on its face, an instrument representing a particular sale of goods, and an absolute acknowledgment of the correctness of the seller's claim as well as a definite promise to pay on a day certain. If the acceptance bears the clause prescribed by the Federal Reserve Board, "The obligation of the acceptor hereof arises out of the purchase of goods from the drawer," it is prime commercial paper rediscountable at Federal Reserve Banks at a lower rate than other commercial paper.

Therefore, every seller who has trade acceptances in his hands, instead of open accounts on his books, puts himself in a position to be treated more liberally by his bank, and secondly, is enabled to handle additional business, or if required, to "carry" a customer who is temporarily embarrassed, or to tide over a season of reduced volume of business.

(b) The buyer who is not in a position to take cash discounts will be better able to compete with the cash buyer.

The trade acceptance, showing on its face that the obligation is made for a purchase of goods, the transaction establishes rather than reflects on the acceptor's credit.

By giving a negotiable evidence of indebtedness to the seller, the buyer shows his good faith and by meeting his obligations, improves his credit. The fact that with every purchase he makes a definite promise to pay on a day certain, will train him to be a more careful and intelligent buyer.

(13) Q. How may a seller introduce the trade acceptance method? A. (a) By making a conditional sale, that is, requiring "trade acceptances" as the terms of sale.

(b) By writing an explanatory letter and following it up by a trade acceptance.

(c) By writing a short explanatory note of a few lines on a perforated section above or below the acceptance, explaining its operation.

("For publicity on the acceptance method," examine forms contained in Part IV).

(14) Q. To what extent may the acceptance method be employed? A. In all transactions calling for credit extension, beginning with the manufacturer who purchases from the first producer, to the ultimate consumer who purchases from the retailer.

(15) Q. What are some advantages which the buyer derives from the trade acceptance method?

A. (a) It develops careful buying on the part of the buyer.

(b) It strengthens his credit and puts him in the position of a preferred buyer.

(c) It develops in him the habit of prompt payment and furnishes him with an excellent excuse for requiring prompt payment from his customers.

(d) It enables him to keep better tract of his outstanding obligations, thereby avoiding the evils of over-extension of credit.

(e) It enables him to realize that credit is as tangible as cash and should be regarded and used accordingly.

(f) It eliminates wastage and lost motion attending the open book account method.

(g) It releases business capital for new transactions.

(h) It improves the chances of the buyer of small means to operate in successful competition with the larger buyers.

(i) It helps the buyer by making him deal always in current transactions, rather than in long, drawn out book accounts.

(j) As the buyer often becomes the seller, the same advantages that apply to the seller apply to him.

(k) It serves as a tonic to the business organizations concerned.

(1) It prevents the accumulation of overdue accounts, and above all, develops a sounder and more serious attitude towards the buyer's own obligations, which is indeed of most benefit to him. It acts therefore, in the capacity of a governor, regulating and protecting the credit of the acceptor.

(16) Q. What are the advantages which the seller derives from the acceptance method?

A. (a) It relieves him from the burden of financing his customers and the consequent burdening of his own capital.

(b) It enables him to conduct business on a more systematic basis with a more regular income schedule.

(c) It puts the burden of proving correctness of the details of the merchandise transaction where it belongs, upon the buyer.

(d) It provides the seller with a liquid asset.

(e) It reduces the expenses of collection.

(f) It simplifies the process by making it a detail in banking machinery.

(g) It promotes the economical treatment of merchandise and enables the seller to do business at a smaller operating cost.

(h) It relieves him from the necessity of selling his accounts at a high rate of interest usually exacted.

(i) It enables him to offer the bank additional security.

(j) It strengthens the seller's financial statement by showing the character of his accounts.

(k) It enables the seller to gauge more accurately the commercial standing of the buyer.

(1) It tends to confine borrowing to funds actually needed.

(m) The seller inoffensively assists the buyer to complete his contract in the way in which he originally intended to complete it.

(n) It enables the seller to more accurately calculate his collections for stated periods.

(o) It enables the seller to facilitate his customer's business by the extension of credit and by deliveries in a way not always possible under the open account system.

(p) It gives to the seller two name paper to present to his bank for discount.

(q) It enables the seller effectively to dispose of the possible necessity of subsequent proof of the legal status of the transaction and to exhibit for inspection the highest possible class of book accounts.

(17) Q. What are the advantages which the banker derives from the trade acceptance method?

A. (a) It enables the banker to measure his risks more accurately.

(b) It provides the banker with substantial evidence of the soundness of the stratum of credit underlying the banking business.

(c) It increases the availability of assets.

(d) It creates a secondary reserve.

(e) It enables the banker to borrow more easily than heretofore, because the trade acceptance can be so easily rediscounted at the Federal Reserve Bank.

(f) It increases the customers' credit and borrowing possibilities.

(g) It creates better commercial paper and a better class of accounts.

(h) It enables the bank to judge whether its customers and its customers' customers are following sound business methods.

(i) It increases the amount of bankable paper on the market by-directing to the bank financing functions, now performed by manufacturers, wholesalers, jobbers and others.

(18) Q. What are the advantages of the trade acceptance system to business in general?

A. (a) It improves trade relations between buyer and seller, by clearly defining their respective obligations. It releases funds otherwise tied up in open book accounts, and by substituting readily commercial paper for non-negotiable book accounts, it makes capital more fluid.

(b) It provides a check against carelessness and extravagance, by reminding the debtor constantly that his credit may be put to the test.

(c) It enables invested capital to do considerably more than its present volume of work, with less risk.

(d) It lowers borrowing rates because of the production of standard paper and because of the elimination of unnecessary risks, and further, because the Federal Reserve Board offers preferential discount rates for this class of paper.

(19) Q. What are some of the evils which the trade acceptance would remedy?

A. (a) The practice of taking unearned and unauthorized discounts, the prevention of losses by bad debts, and the evils attendant upon the carrying of overdue accounts.

(b) The prevention of secret assignment of book accounts.

(c) The prevention of the practice of canceling orders and returning goods without sufficient reason.

(d) The prevention of overbuying and overselling.

(20) Q. Does the trade acceptance eliminate the promissory note?

A. No. The promissory note deals with all kinds of business transactions; the trade acceptance with current merchandise transactions only. The trade acceptance is not to be given for borrowed money or past due obligations.

(21) Q. What is the effect of trade acceptances upon credit?

A. The trade acceptance method does not change the term of the credit-it simply carries the credit in better form. The merchant whose statements show "acceptances payable" and "acceptances receivable" should be entitled to a higher credit rating than one whose statements show "accounts payable" and "accounts receivable." The merchant who brings his transaction out into the open and serves notice upon the business world that he is willing to meet his obligations at maturity, is a better business risk, and hence, entitled to better treatment than one who has his accounts carried upon an indefinite and unbusiness like arrangement, as is prevalent in the open account method.

Procedure

(22) Q. Where is a trade acceptance payable?

A. Ordinarily, at the buyer's bank, or at some other place mutually agreed upon at the time of its issue.

(23) Q. By whom is the trade acceptance presented for discount?

A. Ordinarily, by the seller of merchandise.

(24) Q. May the buyer present a trade acceptance for discount instead of the seller?

A. Yes, if agreeable to the seller, and if there is a reason for so doing. This is frequently done when it is possible for a buyer to procure a better discount rate from his bank than the seller could secure from his.

(25) Q. Can the acceptance be legally treated as a check chargeable against the buyer's balance at his bank without further instructions or authority?

A. This may be answered in the affirmative. The Negotiable Instruments Act provides that "Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon." Express authority or instructions from the bank's depositor, the acceptor, is not required in the opinion of some authorities, assuming of course, that the acceptor has on deposit with the bank sufficient funds for the purpose.

The Federal Reserve And Acceptances

(27) Q. What is the attitude of the Federal Reserve Board towards acceptances?

A. The Federal Reserve Board has expressed its unqualified approval of the acceptance method, by selecting it from the class of commercial paper and giving to it a regular credit standing. It has seen fit to establish preferential discount rates to encourage their use, as it believes that in this way could be made possible the maintenance of a highly elastic credit system.

(28) Q. What are the advantages offered by the Federal Reserve System as an inducement to the use of trade acceptances ?

A. (a) The system offers extensive rediscount facilities with preferential rates.

(b) The banks are not restricted in their loans and purchases of acceptances as in the case of single name paper, to any one person or concern.

(29) Q. What is eligibility, and what are the requirements of eligibility as applied to trade acceptances?

A. By eligibility is meant the quality of the acceptance which the Federal Reserve Bank will rediscount. In order that an acceptance should be eligible,

1. The obligation must have arisen out of an actual commercial transaction, domestic or foreign;

2. It must have a maturity at the time of purchase of not more than ninety days, exclusive of days of grace;

3. It must be indorsed by a member bank or supported by a satisfactory statement of the financial condition of one or more of the parties thereto.

(30) Q. What are the requirements by Federal Reserve banks as to evidence of eligibility?

A. (a) The acceptance must present prima facie evidence of eligibility.

(b) It must bear a stamp, or certificate, affixed by the acceptor or drawer showing that it is a trade acceptance.