Both checks and drafts are written orders that instruct a financial institution to pay a specific amount of money to a designated recipient. However, there are key differences between the two:
Check
- Definition: A check is a written order drawn on a bank, payable on demand, directing the bank to pay a specified sum of money to a named person or to the bearer.
- Who issues it: Individuals or businesses.
- Payment process: Typically used for immediate payment.
- Frequency: More commonly used than drafts.
Draft
- Definition: A draft is a written order drawn by one party (the drawer) directing another party (the drawee) to pay a specific sum of money to a third party (the payee).
- Who issues it: Often used by businesses for transactions with other businesses.
- Payment process: May be payable on demand or at a future date.
- Frequency: Less common than checks.
Key Differences:
- Drawer: Checks are drawn on a bank, while drafts are drawn by one party to another party.
- Drawee: The drawee for a check is always the bank, while the drawee for a draft can be any party.
- Time of payment: Checks are typically payable on demand, while drafts can be payable on demand or at a future date.
- Use: Checks are more commonly used for personal transactions, while drafts are often used for business transactions.
Types of Drafts:
There are various types of drafts, including:
- Sight draft: Payable immediately upon presentation to the drawee.
- Time draft: Payable at a future date specified on the draft.
- Bank draft: A draft drawn by a bank on itself.
- Trade draft: Used in international trade transactions to finance the shipment of goods.
Summary:
While both checks and drafts are written orders for payment, their differences lie in the drawer, drawee, and payment process. Checks are primarily used for personal transactions, while drafts are often used for business transactions, especially in international trade.