Bank draft definition
/What is a 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 guaranteeing 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.
When to Use a Bank Draft
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.
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When You Cannot Collect on a Bank Draft
A bank draft is low-risk for the recipient of funds, but there are two situations in which the payee 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.
Advantages of Using a Bank Draft
Using a bank draft has many advantages, including the following:
Payment security. Since a bank draft is guaranteed by the issuing bank, it eliminates the risk of a bounced check due to insufficient funds. The bank ensures that the money is available before issuing the draft.
Wide acceptance. Bank drafts are widely accepted as a secure form of payment, particularly for large transactions like real estate purchases, car sales, or international business deals.
Fraud prevention. Bank drafts are harder to forge than personal checks because they include built-in security features such as watermarks and bank-specific identifiers.
International payments. Bank drafts are often used in international transactions. They provide a reliable way to make payments in foreign currencies and are generally more secure than personal checks.
No requirement for payee banking details. The recipient does not need to provide their banking details. This is beneficial in transactions where privacy or security is a concern.
Certainty of payment. The funds are withdrawn from the payer's account and held by the bank at the time of issuance. This guarantees the recipient will receive the specified amount, making bank drafts particularly useful in situations where trust between the parties may be limited.
Proof of payment. A bank draft serves as concrete evidence that a payment has been made, useful for both the payer and the recipient for record-keeping and disputes.
Useful for large transactions. Bank drafts are often used for large purchases, as the guaranteed funds give the recipient confidence in the transaction.
Terms Similar to Bank Draft
A bank draft is also known as a cashier's check.