draft, in banking

draft, in banking, order by one party to another party to pay a stated sum to the person or firm in whose favor the draft is made. It is similar in form to the ordinary bank check. Often the drawer and the drawee of a draft are the same person. A sight draft is payable immediately on presentation to the drawee; a time draft is payable at a fixed date in the future. A draft is sometimes known as a bill of exchange. It was originally devised to give credit to a customer who intended to pay in the future, but it came to be used to pay foreign debts (see foreign exchange) because it obviated the bother, expense, and risk of transmitting money. Apparently, drafts were used in early Babylon, Egypt, and Rome, but the earliest clear instance of their use is in Genoa c.1156. Drafts are usually used in commercial transactions in which buyer and seller are distant from each other. The seller draws a draft against the buyer of his goods and sends the draft, together with shipping documents, to his bank. The bank or its agent presents the draft to the buyer for his acceptance of the obligation or for payment. If, in the case of a time draft, the buyer accepts the obligation to pay, he will often put a note to that effect, along with his signature, on the draft. Such an accepted draft is known as a trade acceptance and represents a legal commitment on the part of the buyer to pay the amount stipulated.

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