Sight Draft
A sight draft, also known as a demand draft or an at-sight draft, is a type of bill of exchange that requires the payer (typically the importer) to make immediate payment upon presentation. It is different from a time draft, which allows for a delay in payment until a specified future date.
In international trade, a sight draft is often used in conjunction with documentary collections. Here’s how it works:
- An exporter ships goods to an importer and draws a sight draft against the importer. This draft is a demand for payment.
- The exporter then provides the draft, along with shipping documents (like a bill of lading), to their bank.
- The exporter’s bank sends these documents to the importer’s bank, acting as a middleman in the transaction.
- The importer’s bank notifies the importer that they have received the shipping documents and that the goods have been shipped. However, the bank will only release these documents (which the importer needs to claim the goods) upon payment of the sight draft.
- Upon presentation of the sight draft to the importer, they must make an immediate payment. Once the payment is made, the bank releases the shipping documents to the importer, allowing them to take possession of the goods.
- The importer’s bank then transfers the payment to the exporter’s bank, which in turn credits the exporter’s account.
A sight draft provides the exporter with a level of protection, ensuring they receive payment before the importer can claim the goods. However, it’s worth noting that while a sight draft requires immediate payment upon presentation, it doesn’t offer the same level of security as a letter of credit, where a bank guarantees payment on behalf of the importer.
Example of a Sight Draft
Let’s explore a hypothetical scenario involving a sight draft in an international trade context.
Scenario: GlobalFurnish & HomeTrendz
Participants:
- GlobalFurnish: A furniture manufacturer based in Vietnam.
- HomeTrendz: A furniture retailer based in the USA.
- VietBank: GlobalFurnish’s bank in Vietnam.
- USABank: HomeTrendz’s bank in the USA.
The Transaction:
- Agreement: GlobalFurnish and HomeTrendz enter into an agreement where HomeTrendz agrees to buy 100 handcrafted wooden chairs for $200 each, totaling $20,000.
- Shipping & Draft Creation: GlobalFurnish ships the chairs and draws a sight draft against HomeTrendz for the total amount of $20,000.
- Document Submission: GlobalFurnish submits the sight draft, along with the bill of lading (proof of shipment) and other relevant shipping documents, to VietBank.
- Bank-to-Bank Communication: VietBank forwards the sight draft and shipping documents to USABank, instructing them to only release the documents to HomeTrendz upon payment of the sight draft.
- Payment Demand: USABank notifies HomeTrendz of the received documents and presents the sight draft, demanding immediate payment of $20,000.
- Payment & Document Release: HomeTrendz pays the demanded amount. Upon receipt of payment, USABank releases the bill of lading and other shipping documents to HomeTrendz. These documents allow HomeTrendz to claim the shipment of chairs from the port.
- Payment Transfer: USABank then transfers the $20,000 to VietBank, who subsequently credits GlobalFurnish’s account with the amount.
In this example, the sight draft ensured that GlobalFurnish would receive payment for the chairs before HomeTrendz could claim the goods from the port. It offered a level of protection to GlobalFurnish, making sure they didn’t release control of the goods without first ensuring payment was made.
