Trade acceptance drafts: The third payment option

The Trade Acceptance Draft (TAD) Program, offers an advantageous third payment option to typical cash (COD) or open account terms for commercial transactions, satisfying the needs of both the buyer and supplier.

The concept of the Trade Acceptance Draft has existed in Europe for years. In England

they are called bills of exchange, in France traits and in South Africa bulls. Introduced to the American business community in 1993, Trade Acceptance Drafts are negotiable instruments, signed by the buyer and made payable to the supplier. Each individual TAD states the amount due, the date it is due for deposit and the buyer's bank information. When the commercial transaction is complete and the buyer has accepted the goods or services, the buyer signs and delivers the TAD to the supplier as payment.The TAD is then sold to our company,Actrade, and payment is advanced to the supplier within 48 hours. We then debit the draft amount on the predetermined due date directly from the buyer's bank account. In essence, the supplier receives immediate payment-fewer fees-and virtually eliminates credit risk and collection responsibilities. This allows the supplier to extend more credit to its buyers and therefore increase sales. The buyer also receives benefits, including extended terms that generally do not require collateral up to six months.This combination proves to be very powerful for many companies financing business-to-business transactions. By allowing a buyer to make extended payments over a period of time without having to commit funds for collateral, the TAD Program enables a purchase to take place without putting a strain on working capital.

There are unique qualities regarding the TAD program that make it attractive to business-to-business customers across the spectrum, regardless of size or industry. The patented electronic encoding process eliminates commercial disputes as a basis for nonpayment. Once we purchase the signed TADs, we become the "holder in due course" of the TAD. Consequently, our company is not subject to any offset or claim of nonperformance, which the buyer might have against the supplier in the original transaction, as an excuse for nonpayment of the TAD. Furthermore, in most cases, there are no asset liens or UCC filings required.As an added benefit, the TAD Program can generally be used to supplement existing credit lines.

Numerous Benefits for Buyers and Suppliers Buyers

V Receive an unsecured line-of-credit.

Improve and manage your cash flow.

Supplement existing credit lines to increase purchasing power.

Fuel growth and working capital demands.

Suppliers

Maximize cash management by converting sales to cash within 48 hours.

Gain credit protection. TADs are sold on a non-recourse basis. This allows you to shift credit risk.

Increase sales by providing an additional source of unsecured credit to your customers.

Use extended terms to give your company a competitive edge in an increasingly competitive marketplace.

How the TAD Program Compares to Other Sources of Financing

Factoring.While factors convert your receivables to cash, there are fundamental differences.A factor will traditionally advance only a selected percentage of receivables while holding all of the receivables as security. In addition to security taken, there is recourse in the event of nonpayment. This means that if a selected receivable is not collected within a specified period of time, a factor can play havoc on your cash flow-forcing you to repay the initial advance and take over collection of the overdue debt.

On the other hand, the TAD Program is generally unsecured and does not conflict with other financing methods. TADs provide immediate payment of the entire receivable to a supplier company at the completion of a sale. immediate payment in the TAD world does not mean remittance within 30 days; it means full payment within 48 hours.

The TAD Program is a unique financial payment mechanism that offers many additional benefits that factoring does not. Choosing the best solution for your company is a matter of determining which financing method meets your company's needs and strategies. Additional TAD benefits include:

Fees may be paid by the buyer or seller (or split) depending upon what the companies agree to, while with factoring the company selling the receivables always pays the factor's fees.

TADs eliminate receivables. The underlying receivable has been converted into a Trade Acceptance Draft. Factors purchase the underlying receivables while we purchase commercial paper based on a specific transaction.

TADs can be sold up to 100 percent of the face value, within 48 hours, less a discount fee. Factors typically advance 75 80 percent.

TADs are transactional. Factors generally purchase all the receivables.

TADs eliminate commercial disputes. Factoring will not help or hinder your position in a commercial dispute.

Bank Financing. Banks are not set up to provide unsecured financing with funding within 48 hours. In most cases, banks are already over collateralized with limited, or no room, for an increase in credit. Banks do not want to originate a transaction and provide a credit evaluation on a case-by-case basis.

Yet, banks are interested in purchasing Actrade's paper.What bank wouldn't want credit insured, short-term commercial paper on business transactions? Actrade provides the service of collection and assumes credit risk on an TAD transactions. Our company holds the patent on the TAD process, allowing us to withdraw payments electronically from a Buyer's designated bank account, cutting costs and reducing the potential for defaults.

Letters of Credit. A letter of credit is a document issued by a bank stating its commitment to pay someone (supplier/exporter) a stated amount of money on behalf of a buyer (importer) so long as the supplier meets very specific terms and conditions. Letters of credit are more formally called documentary letters of credit because the banks handling the transaction deal in documents as opposed to goods.

In the case of a letter of credit the supplier must meet very specific terms and conditions generally requiring collateral, which may also include a lien on their assets. If the specific terms and conditions are not met, there is no guarantee of payment.TADs are unsecured.We purchase TADs from the supplier in exchange for immediate cash, which eliminates collection costs and risk. We then collect from the buyer's bank on the designated due date(s).

Safety of the TAD Program

The TAD Program incorporates many safeguards to minimize the risk of nonpayment.As in commercial paper transactions,TADs eliminate any commercial dispute. When a buyer signs a TAD, the Buyer becomes obligated to pay such TAD at a designated bank when it becomes due. It is understood that the TAD will automatically be debited from the buyer's designated bank account on the due date. Essentially, the TAD Program separates the financial from the commercial transaction between buyer and supplier.

For example, a supplier delivers computers to a buyer.The buyer inspects the computers, finds them acceptable and signs and returns the TAD(s) to the supplier. The Supplier is then considered paid. We purchase the TADs from the Supplier, eliminating the supplier's receivables for the particular transaction. If the next day, the computers are found to be inoperable or defective, the buyer cannot legally stop payment on the TAD, unlike a check.Though TADs are processed like checks, they are not checks. TADs are similar to a leasing agreement. If you lease a car, you have no legal right not to pay the leasing company if you are unhappy with the car.Your dispute is with the car manufacturer.

A TAD transaction is totally different from open account terms. In the case of the TAD Program, the buyer has made a commitment. If the buyer has a cash flow problem as the due date of the TAD approaches, the buyer will typically stretch out other open account payables to promptly pay on the TAD. Furthermore, a supplier's credit manager will not hear from the buyer," Sorry, can you allow me two more weeks to pay?" or,"The check is in the mail."Collection is between the buyer and Actrade.

We analyze the buyer's cash balances and ensure that each TAD is a small portion of the buyer's payables.We also perform a rigorous and comprehensive credit check on the buyer. This analysis includes, but is not limited to, D&B reports, bank/trade references, and financial statement ratio analysis. Monthly installments give an early warning about a potential problem.

Diversification

By accepting TADs issued by a large number of customers, the risk of loss is reduced. Each supplier accepts TADs from many unrelated buyer companies. Therefore, our exposure to nonpayment by any one company is limited.

Guarantees and Insurance

The buyer unconditionally guarantees TADs. Further, in many cases, we are able to secure collection of TADs purchased through business credit insurance policies arranged with major insurance carriers. In the case of a buyer with weak credit, we will not do business. In limited cases, we may request personal guarantees from the buyer's principals.

Universal Appeal of the TAD Program

Any company that buys or sells any type of product or service can use the TAD Program to improve cash flows, gain credit protection, and increase profitability and purchasing power, while reducing administrative costs. Our company works with both new and existing customers to create new uses for the TAD program every day. The goal in receivables management is to convert sales into cash as quickly and cost efficiently as possible. To do this, while still being able to offer a customer extended terms, is a win/win situation for all parties involved.

AUTHOR_AFFILIATION

Richard Couzzi; is the director of credit and collections at Actrade Capital, Inc. in Somerset, NJ. He can be reached at 732/868-3100 ext. 240, or via email to rcouzzi@actrade.com.