Sight draft

3 key takeaways

A sight draft involves immediate payment upon presentation, making it a secure and prompt method for international trade transactions. It ensures the seller receives payment before the buyer takes possession of the goods, providing a reliable way to manage financial risk in trade.

• A sight draft demands immediate payment upon presentation, unlike a time draft which allows for payment at a future date.
• It is commonly used in international trade to ensure prompt payment for goods shipped.
• Sight drafts are often accompanied by shipping documents, which the buyer must receive before taking possession of the goods.

What is a sight draft?

A sight draft, also known as a demand draft, is a type of bill of exchange where payment is due immediately upon presentation to the drawee. This financial instrument is widely used in international trade to facilitate secure and prompt transactions between exporters and importers.

How a sight draft works

In a typical transaction involving a sight draft, the exporter (seller) ships the goods to the importer (buyer) and draws a sight draft on the buyer for the amount due. The exporter then presents the sight draft, along with the shipping documents (such as the bill of lading, invoice, and insurance certificate), to their bank. The exporter’s bank forwards the draft and documents to the importer’s bank. Upon receiving the sight draft and documents, the importer’s bank presents them to the importer. The importer pays the draft amount to their bank, which then releases the shipping documents to the importer. Finally, the importer’s bank transfers the payment to the exporter’s bank, completing the transaction.

Advantages of using sight drafts

Using sight drafts offers several advantages:

• Immediate payment: The seller receives payment upon presentation of the draft, reducing the risk of non-payment.
• Security: The buyer can only obtain the shipping documents and thus take possession of the goods after paying the sight draft.
• Documentation: Accompanying documents ensure that the transaction details are clear and that both parties fulfill their contractual obligations.

However, there are also some disadvantages to consider.

Disadvantages of using sight drafts

While beneficial, sight drafts can impact cash flow for the buyer, as they must have sufficient funds available to pay the draft upon presentation. Additionally, both the exporter and importer may incur bank charges for processing the sight draft and handling the documents.

Example of a sight draft in practice

Consider an electronics exporter in Japan who ships a consignment of goods to an importer in the United States. The exporter draws a sight draft on the importer for $50,000. The exporter’s bank sends the draft and shipping documents to the importer’s bank. Upon presentation, the importer pays the $50,000 to their bank and receives the shipping documents. The importer’s bank then transfers the funds to the exporter’s bank, completing the payment process.

Sight draft vs. time draft

A sight draft requires payment immediately upon presentation, making it ideal for situations where the seller seeks immediate payment and may be unsure of the buyer’s creditworthiness.

In contrast, a time draft allows payment at a specified future date (e.g., 30, 60, or 90 days after sight or date), providing the buyer more time to pay and typically used when there is established trust between the buyer and seller.

Sight drafts are essential tools in international trade, providing security and prompt payment for exporters while ensuring that importers receive the necessary documents to take possession of goods.