Sight Draft - Definition
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What is a Sight Draft?
A sight draft is a form of bill of exchange which is payable as soon as it is presented for payment. This is in contrast to a time draft, which is payable on or after a stated period of time.
How Does a Sight Draft Work?
Sight drafts are generally used in import-export agreements.
Exporters (Sellers) work with a bank to draw the draft, which is then sent to the Importer's (Buyer's) bank along with the Bill of Lading for the goods shipped.
The importer will then go to the bank to receive the bill of lading. The importer will pay its bank the amount of the sight draft. The Importer's bank will then pay the Exporter's bank.
In some cases the Buyer will pay with money (Documents against Payment transaction). Other times, the buyer will pay with a Bill of Exchange (Documents against Acceptance Transaction). With a Bill of Exchange, the buyer is obligated to make cash payment based upon the terms of the Bill of Exchange.
The advantage of the sight draft is that the exporter retains ownership of the goods until payment is made. One of the drawbacks of a sight draft is that an exporter does not receive payment for goods until an importer receives them.