Bankers acceptance - what is a draft?

As most of you know, a BA is an instrument of the money market. Basically, it serves as a short term instrument of discount. This tool generally arises during international trade. But in order to fully understand Bankers acceptance to the fullest degree, you must understand what a draft is.

A draft is, basically, an order that is legally binding communication from a first party (who is known as the drawer) to the second party (who is known as the drawee) communicating the need to make payment to the third party (who is called the payee). Sound difficult to grasp? Actually, it is really quite simple.

These three parties do not necessarily have to be distinct. Actually, one can write themselves a check, which would be a very common method of transferring funds from one account to another. In this case, the individual is playing both the part of the first and third parties, with the bank playing the role as the second.

When a draft like this will guarantee that payment will be made for goods on an international level, a bill of exchange is said to have been struck.  In some cases, a draft might require that immediate payment be made to the third party by the second party with the presentation of the draft. In these cases, a sight draft is in order. Checks are a good example of a sight draft, as the payment is very immediate in nature.

And then, there are time drafts. In these cases, an importer might write a draft stating that payment is to be made within 60 days of the arrival of the goods. These drafts are not immediate, but rather “timed”… hence their name. Bankers acceptance and drafts are all a huge part of international trade.
 

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