Sight Draft: Meaning, How it Works, Comparisons
What Is a Sight Draft?
A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them. Sight drafts are used with both air shipments and ocean shipments for financing transactions on goods in international trade. Unlike a time draft, which allows for a short-term delay in payment after the importer receives the goods, a sight draft is payable immediately.
Key Takeaways
- A sight draft is a payment document used in international trade whereby a buyer accepts shipped goods and agrees to pay the seller immediately upon delivery.
- As a type of bill of exchange, sight drafts are utilized in international trade to facilitate short-term financing between importers and exporters.
- Because there is no time delay or waiting period with a sight draft, these usually must be accompanied by an official letter of credit issued by a commercial bank.
Sight Drafts Explained
A bill of exchange is a written order once used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by endorsements. These come in two main forms: sight drafts and time drafts.
A shortcoming of sight drafts is that if the importing country disallows the shipment or the importer is unable to pay for the shipment when it arrives, the exporter will not get paid and will be responsible for return shipping or disposal costs. Sight drafts must be accompanied by a letter of credit and other required documents, such as an ocean bill of lading, in order to be paid.
If a seller wished to retain title to a shipment until it reached its final destination and is subsequently paid for, a sight draft would be the preferred method of exchange. A couple of differences exist for goods shipped by sea and air.
When shipping by water, before cargo can be released, an original ocean bill of lading must be properly signed by the buyer and surrendered to the carrier, since it is the document proving title. On the other hand, air waybills of lading do not need to be presented in order for the buyer to take title to goods. Thus, there is a greater risk when a sight draft is used with a shipment made by air.
Sight Draft vs. Time Draft
A time draft is another type of draft used in international trade. A time draft is a form of payment that is guaranteed by an issuing bank but is not payable in full until a specified amount of time after it is received and accepted. Many international trade transactions use drafts as a way to indicate the terms of payment for shipped goods. A time draft allows the importer (or buyer) time to pay for the goods received from the exporter (or seller). With a sight draft, however, once the importer accepts the documents and everything appears in order, the sight draft requires immediate payment from the buyer to the seller.
As a result, the key difference between a time draft and a sight draft is that sight drafts require an immediate payment while time drafts allow the importer to pay at a later date.
