Draft / Bill of Exchange

A draft (also known as a bill of exchange) is an important payment instrument in international trade. It is a written order issued by the drawer (usually the exporter) requiring the drawee (usually the importer or its bank) to pay a certain sum unconditionally to the payee or holder at sight or on a specified date. It is commonly used in settlement methods such as letters of credit and documentary collections, serving as a financing and settlement document. Usage scenarios include: the exporter collecting payment from the importer through a bank, or discounting the draft with a bank to obtain funds in advance. Points to note: a draft must contain legally required elements such as drawer, drawee, payee, amount, date of payment, date of issue, etc.; a distinction must be made between sight drafts and usance drafts; under a letter of credit, the drawee of the draft is usually the issuing bank or its designated bank. Differences from other terms: a draft is a payment order, whereas a promissory note is a payment promise; after acceptance, a draft becomes an accepted draft and can be circulated and transferred. Foreign trade practitioners need to be familiar with the procedures for drawing, accepting, paying, and recourse of drafts to reduce collection risks.