Demand drafts are payable on demand and used for international payments. They can be accompanied by other relevant documents and allow the exporter to ensure payment and review the terms of the sale. Verification by the bank may take up to three days.
Demand drafts are financial instruments payable on demand, once presented by the beneficiary. This is in contrast to the time draft, where the instrument cannot be honored until a specific date in the future. It is not unusual for an exporter to use demand draft as the most convenient form of payment when arranging to ship goods to a customer in an international location.
In some cases, an open draft is included along with all other documents that are relevant to the shipment. For example, the draft may be included along with copies of the negotiation documents that describe the terms of the sale. Any contracts, shipping instructions or documents required for customs purposes will also accompany the draft. This provides the exporter with everything needed to finish preparing and shipping the customer’s order.
One of the main benefits of the sight draft is that the document allows the exporter to ensure payment for the shipment. At the same time, the exporter has the opportunity to review the attached documents and make sure that the client’s expectations are in harmony with the outcome of the order negotiations. If there is a difference between the documents, the issue can be resolved before the shipment leaves the port of origin. For example, if the negotiation documents show one price for the order and the draft shows a different figure, it is possible to reconcile the issue before anything is shipped. Ultimately, this saves the exporter and recipient a great deal of time and trouble.
While a demand draft is defined as a pay-on-demand document, that does not necessarily mean that the draft will be fulfilled immediately. In most cases, it will take time for the bank receiving the draft to verify the document, along with other documents that are submitted with the draft on view. Any apparent problems with the documents are reported to the beneficiary as they are discovered, allowing the client to be contacted and steps taken to resolve the situation. If everything is in order, the beneficiary will receive full credit for the funds within one to three business days. In some situations where the bank and draft submitter have established an ongoing working relationship, funds may be available in a matter of hours rather than days.
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