Legal Definitions - time draft

A time draft is a type of financial instrument, similar to a check, but with a crucial difference: it instructs one party to pay a specific sum of money to another party at a future date, rather than immediately upon presentation. It's essentially a written order from one person or entity (the "drawer") to another (the "drawee") to pay a third person or entity (the "payee") a definite amount of money at a specified future time or after a certain period has passed. This allows for a delay in payment, providing credit to the buyer while giving the seller a promise of future payment.

• Example 1: International Trade
  A clothing retailer in the United States (the drawer) orders a large shipment of sweaters from a manufacturer in Vietnam (the payee). To facilitate the transaction and allow the retailer time to sell the goods before paying, they agree on a time draft. The retailer issues a time draft instructing their bank (the drawee) to pay the Vietnamese manufacturer the agreed amount 90 days after the manufacturer ships the sweaters.

  How it illustrates the term: This is a time draft because the payment is not immediate but is scheduled for a specific future date (90 days after shipment), providing a credit period for the U.S. retailer to receive and potentially sell the goods before the payment is due.

• Example 2: Business-to-Business Supply
  A construction company (the drawer) needs a large quantity of specialized building materials from a supplier (the payee) for an upcoming project. The supplier agrees to provide the materials, but instead of immediate payment, the construction company issues a time draft. This draft instructs the construction company's bank (the drawee) to pay the supplier the total cost of the materials 60 days from the date the materials are delivered to the construction site.

  How it illustrates the term: Here, the payment for the building materials is deferred for 60 days after delivery, making it a time draft. It allows the construction company to receive and potentially use the materials before the payment obligation matures.

• Example 3: Export Financing
  An electronics exporter in Germany (the drawer) sells a batch of high-tech components to a distributor in Brazil (the payee). To secure payment and manage cash flow, the German exporter draws a time draft on the Brazilian distributor's bank (the drawee) for the value of the components, payable "30 days after sight." This means that once the Brazilian bank "sights" (receives and accepts) the draft, they are obligated to pay the German exporter in 30 days.

  How it illustrates the term: This is a time draft because payment is not immediate but occurs 30 days after the draft is presented and accepted by the drawee bank, providing a short-term credit period to the Brazilian distributor while assuring the German exporter of future payment.