Credit Investigation Always Necessary. Credit Of Parties To The Bill Should Always Be Investigated

Proper investigation of the credit standing of the parties to the acceptance is just as necessary in the acceptance method as when goods are sold on open account. The responsibility of the acceptor as well as of the drawer should always be ascertained. In discounting trade acceptances for their customers, banks may suit themselves as to the requirement of a statement from the acceptor. However, in the case of an unusual amount of acceptances being discounted, the bank should procure sufficient information in order to enable it to determine whether the acceptor is of good moral and financial standing and whether he is capable of meeting his obligations upon maturity.

Trade Acceptances Intended For Current Transactions Only. Trade Acceptance Should Represent Current Transactions Only

The trade acceptance has a specific function to perform, and should be used for one purpose only, that is, as a negotiable acknowledgment of an actual sale of goods from a seller to a buyer. It covers a live transaction, drawn for the time involved in the terms of the sale. In order to maintain their high commercial standing, acceptances should not be used for any other purpose but that involving present merchandise transactions. Overdue accounts should not give rise to acceptances in any event.

Renewals Should Not Be Encouraged

Under normal conditions, a trade acceptance should not be renewed, since it no longer represents a current transaction. Acceptances should always be paid at maturity. Instances have been observed where it was expected that a trade acceptance would be renewed from time to time on the plea that sales by the drawer to the acceptor were occurring each month, aggregating or exceeding the amount of the trade acceptance. This is not good practice. The acceptance should be drawn for a period corresponding to the sale, and wherever possible, for the actual amount due on the particular sale, or accumulation of sales. The exception to this latter statement takes place when it is necessary to issue acceptances in smaller pieces to facilitate their discount.

Acceptance Does Not Imply The Granting Of Longer Term Credits

The giving of trade acceptances should not be used as an excuse for obtaining unreasonable time in sales terms. Many firms desiring to introduce the trade acceptance plan in financing their business have adopted the plan of granting additional time or longer term credits to their customers. While many firms have in this way successfully introduced the acceptance, others believe that undue inducements in the form of extension of time and of discounts, in order to convert accounts into the liquid form of trade acceptances, will tend to cheapen the calibre of the acceptance.

Acceptance Should Be Introduced To All Alike

Many concerns have adopted the acceptance in the case of customers who have proved themselves to be slow payers. While there is no objection to this method itself, still if the concern attempts to market or discount these acceptances and makes claim to a preferential rate because of the two name self-liquidating character of the paper, it would not be doing the acceptance method full justice and would not allow the full benefits which may accrue from it.

Moreover, when one considers that the trade acceptance method serves to show the bank the character of buyers to whom the borrower is selling, and whether or not these buyers pay promptly, the bank receiving for discount from its customer acceptances of companies of inferior credit standing and slow-paying reputation will not become very enthusiastic about making a preferential rate, but may even feel like revising upward the loaning terms to that customer. A company which uses the acceptance for reforming its slow-paying accounts should not market such acceptances or discount them as first-class paper for this tends to cheapen the trade acceptance movement.

Guarding Against Fraudulent Acceptances

As in every line of activity the good are mingled with the bad, so in the trade acceptance is there a danger of fraudulent commercial paper arising. Just the same as the banks have to contend with difficulties arising from fraudulent drawings of checks, in the same way is it possible that acceptances representing fictitious transactions should be created. Banks should exercise great precaution and should extend their credit watchfulness by every possible means to prevent forgery and fictitiousness.

Publicity In Acceptance Should Be Extended Liberally

To those firms which seek to adopt the trade acceptance plan, it might be said that publicity from the start with full explanation and education should be given to the buyer on the subject of the trade acceptance and its advantages to him. No arbitrary action should be forced upon the buyer, but on the other hand, a general outline of the principles of the acceptance method should at all times be the means of inducing the buyer to adopt it as a legitimate means of financing his purchases.