A Complete Guide - What Is a Bank Draft? Definition & How It Works
What is a bank draft?
A bank draft is an instrument issued by a bank that ensures the amount stipulated is guaranteed. The bank will withdraw funds from the payer’s account before issuing the draft; hence, it is safe for any transaction.
How is a bank draft different from other payment methods?
- Personal checks: Bank drafts are prepaid and guaranteed by the bank, so there is little or no risk of bouncing, unlike personal checks.
- Money orders: Money orders are prepaid but usually have lower maximum limits and require purchase from specific outlets. Bank drafts can be issued for larger amounts directly from your bank.
How does a bank draft work?
- Requesting the draft: You can go to the bank, request a bank draft, or access it online through your banking services. Secondly, provide them with the amount and to whom you request them to pay the sum.
- Payment: The bank will take the amount of money you have entrusted them with from your account. Therefore, this ensures funds are available without the risk of the draft bouncing.
- Issuance: The bank will then issue a paper draft, which comprises the details about the bank, amount, and name of the payee.
- Delivery: You can hand over the bank draft to the payee to deposit into his or her account in a bank.
What are the benefits of using a bank draft?
- Safety and security of funds: Bank drafts are regarded as a relatively safe method of payment, in the sense that they have underlying support from the bank issuing them. For example, the funds should be validated and held in reserve before the draft is issued; thus, the risks involved with bouncing or fraudulent activities are much reduced.
- Acceptance by sellers and business: A huge benefit for sellers as bank drafts are useful for conducting big deals/transactions, for example in the automobile industry or real estate.
- Pre-authorization of funds: Since funds are withdrawn at the time of issue of the bank draft, there is no such uncertainty as to whether the payee has sufficient funds available. This pre-authorization gives both the payer as well as the payee surety that the deal is secure and guaranteed.
How do I get a bank draft?
- Documentation needed: A valid ID, like a driver’s license, and your bank account details are needed.
- General requirements: Most banks will ask for proof of identity, draft amount, and the payee’s name.
- How to apply:You can apply for a bank draft either at a branch by filling up a form or through the online facility by keying in the required details. The bank will then deduct the amount and issue the draft.
How much does a bank draft cost?
Bank draft fees vary depending on the bank by account type and even draft amount. For more queries, you can always request direct assistance from your bank.
How to cancel a bank draft?
A bank draft cannot be cancelled once it has been delivered to the designated recipient. Its delivery to the payee is your responsibility as the buyer. If it is lost, you will have to follow certain steps to get a replacement, which can include signing an indemnification agreement or supplying a surety bond.
Does a bank draft have a limit?
No, when you request a bank draft, you are not restricted to a certain quantity of money. This is a key justification for using bank drafts for large-scale financial transactions.
The Bottom Line
A bank guarantee is an indispensable tool in reducing the risks that any transaction undertaken by either party in a contractual agreement bears. It promotes trust while providing a financial cushion in making business interactions easier and less complicated.
Get a bank guarantee for your next big transaction from a trustworthy UK trade financing firm. In order to ensure a smooth experience for your financial needs, our experts are committed to assisting you in obtaining your bank guarantee as soon as possible and with the least amount of difficulty.
FAQs
1. What are the benefits of using a bank draft?
Bank drafts are commonly used for big transactions and provide guaranteed funds and enhanced security.
2. How do I get a draft from the bank?
By presenting the required identity and payment information, you can get a bank draft by going to your bank in person or through online banking.
3. Is it possible to conduct foreign transactions using a bank draft?
Although you should confirm that the recipient’s bank allows them, bank drafts can be used for overseas transactions.
