Draft

A draft is a signed, written order by which one party, the drawer, instructs another party, the drawee, to pay a specified sum to a third party, the payee, either immediately on presentation or on a specified future date. A typical bank draft qualifies as a negotiable instrument and functions in many practical respects much like an ordinary check, though it is drawn directly against the issuing bank's own funds rather than against an individual customer's personal checking account.

Because a bank draft is backed by the issuing institution's own funds rather than by any individual's personal account balance, it carries a meaningfully higher assurance of payment than an ordinary personal check, which is exactly why bank drafts are so commonly required for large transactions such as real estate settlements.

A draft is essentially a formal instruction, given in writing, telling one party to pay someone else a specific stated amount. A banker's draft is the most familiar everyday example: the bank itself promises to pay, having already collected the necessary funds in advance from the customer who requested the draft, which is precisely why the recipient can trust it far more readily than an ordinary personal check that might potentially bounce.

In trade finance specifically, a draft is also the basic instrument used to formally demand payment from a buyer, often accompanying shipping documents as part of a documentary collection arrangement.

A sight draft is payable immediately on presentation to the drawee, while a time draft, also commonly called a usance draft, is payable at a specified future date or after a set period following presentation — a structure commonly used in trade finance specifically to give an importer a short defined period to arrange payment after receiving goods or documents.

In documentary collections and letters of credit, an exporter draws a draft on the importer or on the importer's own bank, formally demanding payment of the amount owed; the draft, together with shipping and title documents, then moves through the banking system until the importer either pays outright or formally accepts the obligation to pay later.

An ordinary personal check is drawn directly against the account holder's own funds held at their bank, while a bank draft is instead issued by the bank itself against its own resources, only after the bank has already received payment upfront from the person who requested the draft — a meaningful distinction because it removes the entire risk of the draft itself bouncing for insufficient personal funds.

Electronic wire transfers and faster domestic payment rails have increasingly taken over many of the roles a bank draft once performed, since both offer comparable payment certainty with considerably less physical handling, though drafts remain in active use in situations where a physical, signed document is still specifically required or preferred by one of the parties involved.

Because a bank draft is treated much like cash once issued, a lost or stolen draft can be genuinely difficult to stop, and most banks require the purchaser to sign an indemnity agreement before issuing a replacement, protecting the bank against the risk that the original draft is later found and cashed by someone else entirely.

This indemnity requirement can delay a replacement by several weeks in some cases, which is one reason large transactions increasingly favor electronic wire transfers over a physical draft wherever both parties are able to accept one.