What Is a Bank Endorsement? Definition, How It Works, and Types

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

What Is a Bank Endorsement?

A bank endorsement is a guarantee made by a bank that it will uphold a check or other negotiable instrument, such as a banker's acceptance, from one of its customers. This assures any third party that the bank will back the obligations of the creator of the instrument in the event that the individual or entity cannot make payment.

Key Takeaways

• Bank endorsements are guarantees from a bank that ensure it will uphold the commitments of its client.
• Common bank endorsements include banker's acceptances and letters of credit.
• A banker's acceptance works as a time draft, specifying payment at a future date. Letters of credit guarantee payment and come in different forms.
• These types of guarantees make international trade between parties easier, particularly when they're unknown to each other.
• Some bank endorsements also remove the need for financing a payment.

Understanding Bank Endorsements

Bank endorsements are common in international trade where the business parties are typically unknown to each other. Banks stand in the middle by assuring good funds to the recipient. In the case of a banker's acceptance, a bank endorsement is the equivalent of a guarantee. A banking institution generally will not provide a banker’s acceptance without a reasonable likelihood that it will be able to provide the funds as specified.

Types of Bank Endorsements

Bank endorsements accompany specific negotiable instruments, including bills of exchange, promissory notes, drafts, and certificates of deposit. They represent payment promises to a specified person referred to as the assignee.

Checks are forms of negotiable instruments, but the most common types of bank endorsements are a banker's acceptance, also known as a time draft, and a letter of credit.

Banker's Acceptances

A banker acceptance is short-term debt. It's an instrument from a bank that promises to pay the holder a specified amount at a specified date, usually between 30 to 180 days. A company issues a banker's acceptance that's guaranteed by a commercial bank. Certain documents are required before a bank will guarantee a banker's acceptance. These documents can include a bill of lading or an invoice.

The exporter would receive the banker's acceptance and be permitted to cash the money in at a future date in this example. The importer would have to pay the bank back before the maturity date. These instruments commonly facilitate international institutions to complete transactions due to the perceived safety of banker's acceptances.

Banker's acceptances can sometimes eliminate the need to extend credit.

An American wine-importing business may issue a banker’s acceptance with a date beyond that when South African wine cases are expected to be delivered. This allows the South African exporting business to have a payment instrument in hand before finalizing a shipment, helping to smooth any obstacles within such an international deal. These could include disparate regulations, language barriers, and/or variances in infrastructure.

What Does It Mean When an Individual Endorses a Check?

An individual endorses a check by signing their name on the back of it. They're effectively attesting or promising that they're the individual to whom the check is written. Cashing a check rather than depositing it when you endorse it typically involves providing the bank with acceptable ID to prove that the check is written to you.

Is a Letter of Credit the Same As a Banker's Acceptance?

A letter of credit is similar to a banker's acceptance in that a bank will guarantee an exporter payment for goods or services in the event that payment isn't made on time or for the right amount. But a letter of credit doesn't work on a time draft function like a banker's acceptance. There are several types of letters of credit, including commercial letters of credit, standby letters of credit, and revolving letters of credit.

When Would a Banker's Acceptance Be Used?

The company generating the banker's acceptance would typically be an importer in a transaction where they're concerned about sending money or payment before receiving goods. The importer would need a banker's acceptance to make the exporter comfortable that they will be paid.

The Bottom Line

A bank endorsement is its promise that the institution will honor a check or other negotiable instrument received from a customer. A third party can feel comfortable that the bank will back the writer of the check or instrument if the individual or entity can't make payment. The practice can be particularly helpful between parties or businesses that are involved in international trade.

1. Collins Dictionary. "Banker's Acceptance."
2. Unacademy. "Endorsement."
3. Corporate Finance Institute. "Banker's Acceptance."
4. DC.gov. "Letter of Credit—Definition."

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