Legal Definitions - trade draft

A trade draft is a specific type of written order used in commercial transactions, typically for the sale of goods. It is an instruction from one party (usually the seller, known as the "drawer") to another party (usually the buyer, known as the "drawee") to pay a specified sum of money to a third party (or to the drawer themselves) at a future date. Essentially, it's a formal way for a seller to extend credit to a buyer, providing a structured payment agreement for goods received.

Here are some examples to illustrate how a trade draft works:

• International Shipment of Goods:

  A furniture manufacturer in Vietnam sells a large container of bedroom sets to a retail chain in Canada. Instead of requiring immediate payment upon shipment, the Vietnamese manufacturer issues a trade draft to the Canadian retailer, instructing them to pay the full amount in 60 days. This allows the Canadian retailer time to receive the furniture, transport it to their warehouses, and begin selling it before the payment is due. The Vietnamese manufacturer can then present this draft to their bank, potentially selling it at a discount to receive cash sooner, while the bank collects the full amount from the Canadian retailer when the draft matures.

  This illustrates a trade draft because it's a formal, written order for payment arising from an international commercial sale, with payment deferred to a future date, providing credit to the buyer.

• Wholesale Purchase of Electronics:

  An electronics wholesaler supplies a significant quantity of new smartphones to a regional electronics store chain. To facilitate the transaction and provide the store chain with time to sell the inventory, the wholesaler draws a trade draft on the store chain, making the payment due in 30 days. This draft serves as a formal promise of payment, which the wholesaler can use as collateral for a loan or simply hold until the due date.

  This demonstrates a trade draft as it's a written instruction from a seller (wholesaler) to a buyer (store chain) to pay a specific amount for goods at a future point, formalizing the credit extended in a domestic business-to-business transaction.

• Raw Material Procurement:

  A textile mill purchases a large volume of raw cotton from an agricultural cooperative. The mill needs time to process the cotton into yarn and fabric before it can generate revenue from sales. The cooperative issues a trade draft to the textile mill, requiring payment in 45 days. This arrangement allows the mill to begin its manufacturing process without immediate cash outlay for the raw materials, while the cooperative has a legally recognized instrument guaranteeing payment for its produce.

  This example highlights a trade draft being used in the procurement of raw materials, where the seller (cooperative) issues a formal demand for payment to the buyer (textile mill) at a future date, enabling the buyer to manage their cash flow.