Assume now that the importer must finance his purchases from abroad. This he may do by requesting his bank to open a sight letter of credit in favor of the foreign shipper, or he may arrange for the foreign shipper to draw a sight draft on him without letter of credit. Simultaneously or on arrival of the draft he will either borrow from his bank or arrange for an acceptance credit with it to finance the importation. The loan transaction needs no discussion. The acceptance credit is more complicated.
Assume that an American lace importer has agreed with the French manufacturer to buy on dollar sight drafts drawn under letter of credit. Assume further, however, that the importer wants at least 90 days' credit--which, note, the French firm is not prepared to extend. In this case the importer may request his bank: (1) to issue a dollar letter of credit, providing for sight drafts, in favor of the French manufacturer; (2) to arrange an acceptance credit on a 90-day basis. What are the results? The exporter in France receives his money at the time he ships the goods. The French bank which purchases the dollar sight draft obtains prompt reimbursement from the drawee American bank. The American importer gets the shipping documents from the American bank on their arrival by signing a trust receipt and immediately draws a draft on the bank for whatever usance is agreed (long enough, presumably, to enable him to sell the goods). This draft, of which the French exporter has neither knowledge nor concern, will be promptly discounted and the proceeds will be used to reimburse the bank for its payment of the French exporter's sight draft under the letter of credit. So, although the original terms between importer and exporter provided for sight draft under letter of credit, the American money market finally carries the import on a 90-day basis under a bank acceptance drawn outside the letter of credit.
If the letter of credit had provided for drafts in francs, the procedure would be essentially the same. Now the French exporter would draw his sight draft under a letter of credit issued by the French correspondent or branch of the American bank. The draft would be paid by the French drawee bank, which would mail the documents to the American bank. The French bank would obtain immediate reimbursement--probably by charging the account of the American bank--and would receive a fee for its services. On the American side all would remain as in the diagram and as before the American money market would carry the credit load.
Suppose, however, that discount rates on 90-day bank paper are lower in Paris and that it would be cheaper to finance the transaction in that market. This could be done most easily, of course, if the French exporter will consent to draw under a 90-day letter of credit in francs. This draft could then be discounted in Paris. But let us retain our previous assumption: the French exporter draws in dollars at sight, under a letter of credit. The draft and documents go forward to New York promptly for payment and, as before, the American bank surrenders the documents to the importer on trust receipt. Now, however, the importer draws a 90-day draft in francs on the Paris correspondent or branch of the New York bank. This draft the New York bank will buy at the spot rate for demand francs in New York, less the discount on 90-day bank paper in Paris and less the bank commission, stamp taxes, and interest for mailing time to Paris. With the dollars so obtained, the American importer reimburses the bank for its payment of the French exporter's sight dollar draft.
The bank, in accordance with arrangements made with its French correspondent or branch, forwards the 90-day franc draft (which is "clean" of documents, since it is not directly related to any shipment of goods) to the drawee bank in Paris, which will accept it in return for a fee or commission. Then if the New York bank wishes to make the 90-day investment, it will hold the Euro acceptance (which it bought, note, at the discount rate prevailing in Paris); otherwise it will discount it in Paris.
At the end of 90 days the Paris bank must meet its obligation under the acceptance, and it will expect to receive from New York the proper amount of Euros for this purpose. These Euros will be provided by the American importer who will, meantime, have sold the lace. Usually (but not invariably) he will have contracted in advance to buy francs at an agreed rate, thus avoiding any exchange risk. Clearly this rather elaborate procedure by which the American importer is enabled to borrow (or discount) in the French money market will be useful only if the total cost of the 90-day discount in Paris, plus the acceptance commission and taxes, plus the rate at which future Euros can be purchased, is less than the 90-day discount rate and acceptance commission which he would have incurred if the acceptance credit had been carried out in the American money market.
Conversely, as one of the earlier acceptance credit examples indicates, an American importer may wish to finance in the United States if money rates are lower here. For example, he may have been buying chinaware in England on a sterling basis on 90-day D/A terms. The English exporter may or may not have been discounting the sterling drafts, but in any case he has probably been including in the price an interest charge for the 90 days which is more or less closely related to the London 90-day rate. If the importer believes he can finance more cheaply in the United States, he may request the exporter to draw on him (or on an English bank, if letter of credit is being used) in sterling, drafts payable at sight. The importer can then arrange a dollar acceptance credit at his bank as before described.
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