Draft is a written order drawn by one party, directing a second party to pay a definite amount of money to a third party. Such a party may be an individual, a corporation, or a bank. Most drafts are used to finance business transactions when the buyer and seller are in different locations. A draft may also be drawn payable to the party that draws it.
A draft may read pay at sight or on demand. In such cases, the draft is like a check, and the payer must pay immediately upon accepting the draft. If a time draft is used, the payer accepts the draft, agreeing to pay it within a stated period of time. The draft, signed by the payer, becomes legally binding and is then called an acceptance or note.
A draft is the same as a bill of exchange except that the term draft usually means a transfer of money between parties in the same country. Bills of exchange are frequently used for the transfer of money abroad. A draft drawn on a bank is a check. Checks originate with the buyer, but trade drafts originate with the seller. Sellers of goods and services often use drafts to avoid the credit risk of open book accounts.
See also Bill of exchange; Commercial paper; Negotiable instrument; Note.
