In freight and international trade, a bank draft (or simply draft) is a formal, written order from the seller (exporter) that directs the buyer (importer) to pay a specific amount of money at a specific time.
It is the bill that is presented alongside the shipping documents. Its primary function is to control the release of the cargo by linking payment to the documents that prove ownership.
Why It’s Used in Shipping
A bank draft solves the fundamental trust problem in international trade:
- The seller (exporter) doesn’t want to give the buyer the cargo until they get paid.
- The buyer (importer) doesn’t want to pay until they know the cargo has been shipped.
The bank draft, when managed by banks, acts as a secure middleman for this transaction.
How It Works in Practice: Cash Against Documents
- Shipment:The exporter ships the cargo and receives the originalBill of Ladingfrom the carrier. The BOL is the title or deed to the cargo — whoever has it can claim the cargo.
- Document collection:The exporter prepares the bank draft and gives it, along with the original BOL and other papers (like the invoice), to their bank.
- Bank-to-Bank:The exporter’s bank sends this package of documents to the importer’s bank at the destination.
- Payment demand:The importer’s bank calls the importer and presents the draft to them.
- Exchange:The importermust pay the bank draft(i.e., pay for the cargo) to be given the original Bill of Lading.
- Cargo release:The importer takes the BOL to the shipping line to prove they have paid and are now the rightful owner, allowing them to finally pick up their cargo.
If the buyer refuses to pay the draft, the bank refuses to give them the Bill of Lading, and the cargo remains the property of the seller.
Key Shipping Terms for Drafts
Time draft:This is a short-term credit. The importer accepts the draft by signing it, which creates a legal promise to pay in (for example) 30, 60, or 90 days. The bank releases the documentsafterthis acceptance, allowing the importer to get their cargo before they have actually paid.
Sight draft:This is the most common. It means the importer must pay the full amountat sight— that is, immediately upon being presented with the draft by the bank.
