The Acceptance As A Means Of Gauging More Accurately The Credit Standing Of The Buyer

The use of the acceptance enables the seller to gauge more accurately the credit standing and paying habits of the buyer. Under the open book account system of settling accounts, the buyer generally allows his accounts to lag over past maturity, to the disadvantage of the seller. Furthermore, the open book account system frequently gives rise to discrepancies in the transactions, as a result of which the buyer must at times forego his reputation of established credit and good business conduct. By this is meant that the open book account method is productive of errors interfering with the conduct and business relations of the parties. The acceptance affords the seller a means of learning the paying habits of the buyer, and of how the buyer meets his obligations.

Acceptance Strengthens The Seller's Financial Standing

In a preceding topic there were discussed the advantages of the acceptance to the seller from a standpoint of liquidity in assets. This advantage is further extended in the judgment of the seller's financial standing. Judging the financial standing of any seller of merchandise, the bank considers accounts receivable as worth only a share of the amount represented. The seller, presenting his financial statement to his bank, will be regarded in a more favorable light if he is a user of acceptances than if he conducts his business on the basis of the open account or on single name paper, as acceptances are looked upon by banks with more favor.

Acceptances Enable Seller To Offer Bank Better Commercial Paper

Trade acceptances are regarded by the Federal Reserve Board as more advantageous for banking business than are single name and other commercial paper. Single name paper is not as preferable to the banker as the trade acceptance, since in the former, one party is liable, while in the latter, the banker may have recourse to two parties who are jointly liable. For this reason, banks are inclined to give better rates in the discount of trade acceptances, and also, because of the fact that they themselves are allowed better rediscount rates by the Federal Reserve Banks in the discount of trade acceptances.

Acceptances No Interference To Seller Or Buyer In Sales

When a deal is consummated between seller and buyer, it may be that certain terms have been arranged upon which the carrying out of the contract might be wholly dependent. The seller may not have arranged to receive cash payment from the buyer and the buyer may not be able to pay any cash for his purchases. The seller, through the acceptance, is enabled to assist the buyer in carrying out his original intentions without the latter being forced to pay, as the burden of financing the buyer is passed along to the bank.

The purpose behind the establishment of a discount market in the United States is to collect the available reserves and funds of the nation to be loaned out and used in the process of absorbing commercial paper and principally acceptances. It is through this last mentioned method that the seller may avail himself of the use of the funds which the bankers are able to collect, for the benefit of the buyer as well as for himself.