To illustrate a trade acceptance, a seller of merchandise draws his draft upon the buyer, say, at ninety days sight, for the amount of the bill, and sends it along with the invoice of merchandise sold, to the buyer for acceptance. The buyer then signs, or accepts this draft drawn upon him, whereby a credit instrument is created. From the standpoint of the seller, he has acquired a definite acceptance of the goods, which the buyer cannot question in the future without a good reason, and he has a promise moreover from the buyer to pay at a definite date a specified sum equal to the amount of the invoice.

The trade acceptance has great advantages over the open account method and over the single name paper, in that it bears two names and thus gives double security, which, from a standpoint of the banker, makes it more preferable as an item of investment. A trade acceptance, moreover, can be discounted at the bank of the seller, and funds obtained with which to continue the conduct of his business. It thus prevents a tie-up of capital and releases the tremendous sums tied up in idle accounts. The buyer, moreover, obtains an advantage through the trade acceptance, in that the reflection upon his credit becomes an established fact, and he makes it known that, as a user of the acceptance, he is a careful buyer and not an over-buyer of merchandise, so conducting his business as to be able to meet his obligations when due. He, in turn, in giving trade acceptances to others, may expect the same to be given by his customers to himself, which he could then utilize in the same way.

The banker is not subject, in his investments in trade acceptances, to the provisions of the National Banking Law, which prohibits a national bank from lending to any one customer an amount in excess of ten per cent, of the banks capital and surplus. By the process of rediscounting with the Federal Reserve Banks, the banker can at any time obtain funds in exchange for his holdings of commercial trade acceptances.