What is a Bank Draft?
A bank draft is a payment instrument that is guaranteed by a bank. It is a check that is drawn on the bank itself, rather than on an individual's account. This means that the bank is responsible for the payment, even if the individual who wrote the draft does not have enough funds in their account.
How does a Bank Draft work?
- The buyer requests a bank draft from their bank. They will need to provide the bank with the amount of the draft and the name of the payee.
- The bank creates a draft and charges the buyer a fee.
- The buyer sends the draft to the payee.
- The payee deposits the draft into their bank account.
- The payee's bank presents the draft to the issuing bank for payment.
- The issuing bank pays the payee's bank, and the funds are deposited into the payee's account.
Advantages of using a Bank Draft
- Guaranteed payment: The bank guarantees the payment, so the payee can be confident that they will receive the funds.
- Increased security: Bank drafts are more secure than personal checks, as they are less likely to be forged or stolen.
- Convenience: Bank drafts are a convenient way to make large payments, as they can be sent by mail or courier.
Disadvantages of using a Bank Draft
- Fees: Banks charge fees for issuing bank drafts.
- Limited availability: Bank drafts are not always available at all banks.
- Processing time: Bank drafts can take a few days to process.
Use Cases for Bank Drafts
- Large payments: Bank drafts are commonly used for large payments, such as real estate transactions, business acquisitions, and international trade.
- Transactions where trust is an issue: Bank drafts can be used when the buyer and seller do not know each other well, as they provide assurance of payment.
- When a personal check is not accepted: Some businesses or individuals may not accept personal checks, but they will accept bank drafts.
Conclusion
Bank drafts are a safe and reliable payment instrument that is used in a variety of commercial transactions. They provide guaranteed payment and increased security, making them an attractive option for both buyers and sellers. However, it is important to be aware of the fees and processing time associated with bank drafts before using them.