Bank draft

A bank draft is a payment on behalf of the payer, which is guaranteed by the issuing bank. A draft is used when the payee wants a highly secure form of payment.

The bank can safely issue this guarantee because it immediately debits the payer's account for the amount of the check, and therefore has no risk. In effect, the required funds have been set aside by the bank. Not only is this a safe transaction for the bank, it is also beneficial, since the bank has ownership of the funds from the time when it debits the payer's account to when the money is eventually paid to the payee (which could be several weeks, depending on when the payer elects to send the check to the payee). In addition, banks charge a fee for this service.

A bank draft may be required by the seller in a transaction when there is a large sale price involved, or when the seller does not have a relationship with the buyer, or has reason to suspect that collecting a payment from the buyer would otherwise be problematic. For example, a bank draft may be required by the seller when a home or an automobile is being sold.

There are two situations in which a seller may not succeed in collecting funds under a bank draft. The first case is when the issuing bank goes bankrupt, so that it is not honoring any outstanding drafts. The second case is when the draft is fraudulent, and so was not actually prepared by a bank.

Similar Terms

A bank draft is also known as a cashier's check.

Related Courses

Corporate Cash Management 
Payables Management