Sight draft definition
/What is a Sight Draft?
A sight draft is a bill of exchange that is due and payable on demand. There is no delay in payment. It is commonly used in international trade transactions.
A sight draft is used when an exporter wants to retain title to shipped goods until paid, usually because the importer is considered to be a credit risk. In effect, a sight draft is used to protect the interests of the exporter. Conversely, importers try to avoid it, since a sight draft negatively impacts their cash flow.
To be paid, a sight draft must be presented along with a letter of credit and a bill of lading.
Characteristics of a Sight Draft
The key characteristics of a sight draft are as follows:
Immediate payment requirement. The payer (drawee) must pay the specified amount immediately upon seeing (sighting) the draft.
Used in international trade. Sight drafts are commonly used in import/export transactions to ensure sellers receive payment before goods are released to buyers.
Involves a bank. Sight drafts are often handled through banks, especially when linked to shipping documents. The bank releases the goods' documents only after payment is made.
Can be “clean” or “documentary.” A clean sight draft requires only payment, with no shipping documents attached. A documentary sight draft includes shipping documents (e.g., bill of lading) and is used in trade finance.
Ensures seller security. A sight draft protects sellers from non-payment risk by requiring the buyer to pay before receiving goods.
Terms Similar to Sight Draft
A variation on the concept is the time draft, where payment is due at a later date.