Sight Draft

Definition

A Sight Draft is a type of financial instrument, often used in international trade, that requires the payment of a specific amount of money upon presentation (on-sight) to the payer. Unlike a time draft, which specifies a future date for payment, a sight draft demands immediate payment by the drawee (typically the buyer or their bank) upon presentation of the draft. This instrument provides security to the seller, ensuring they receive payment promptly once the goods have reached the buyer or an intermediary point agreed upon.

Examples

Export Transactions: A U.S. exporter ships electronics to a buyer in Germany. The exporter uses a sight draft, sent through their bank, which demands payment immediately when presented to the buyer’s bank in Germany upon receiving the shipping documents.
Import Transactions: A company in Japan imports raw materials from China. The Chinese supplier sends a sight draft through a bank, requiring payment from the Japanese importer once the goods arrive and the shipping documents are presented.
Agricultural Trade: An Argentine farmer sells soybeans to a customer in the UK and uses a sight draft. Upon the UK buyer retrieving the shipping documents from the bank, they must make the payment immediately.

Frequently Asked Questions (FAQ)

What is the difference between a sight draft and a time draft?

A sight draft requires immediate payment upon presentation, whereas a time draft specifies a future date when payment is due.

How does a sight draft work in international trade?

In international trade, the seller’s bank sends the sight draft and shipping documents to the buyer’s bank. The buyer retrieves the documents only after making the required payment, ensuring the seller receives payment promptly.

Can a sight draft be dishonored?

Yes, a sight draft can be dishonored if the drawee (buyer) refuses to make the payment upon presentation. In such cases, the bank holding the documents will not release them to the buyer.

Which parties are involved in a sight draft transaction?

Typically, there are at least three parties involved: the drawer (seller), the drawee (buyer), and the intermediary banks that facilitate the document exchange and payment processing.

Why might a seller prefer a sight draft over other payment methods?

Sellers prefer sight drafts because they ensure quicker payment once the goods are shipped and the documents are presented, reducing the seller’s risk of non-payment.

Bill of Exchange

A negotiable financial instrument that contains an order to pay a specific amount to a specified person on demand or at a predetermined future date.

Documentary Collection

A process by which banks handle documents according to instructions received, in order to release goods to the buyer upon payment or acceptance of a draft.

Letter of Credit

A document issued by a bank guaranteeing payment to a seller once certain delivery conditions have been met.

Trade Finance

The various financial products and instruments that companies utilize to facilitate international commerce and trade, including letters of credit, drafts, and credit lines.

Online Resources

Investopedia - Sight Draft: Investopedia
International Trade Administration - Exporter’s Guide: Export.gov
ICC - Uniform Customs and Practice for Documentary Credits: ICC
World Trade Organization (WTO): WTO

Suggested Books for Further Studies

International Trade Finance: by Yakov Amihud and Gary L. Schmuckler
Trade Finance Handbook: by Phillip P. Heiskala
The Law of International Trade Finance: by Ebenezer Adodo
Understanding International Trade and Business: by Karla C. Shippey

Accounting Basics: Sight Draft Fundamentals Quiz

### What distinguishes a sight draft from other types of drafts? - [ ] It is payable at a future date. - [ ] It comes with a higher interest rate. - [x] It demands payment immediately upon presentation. - [ ] It is used only in domestic trade. > **Explanation:** A sight draft demands immediate payment upon presentation, unlike other drafts that may be payable at a future date. ### In what situation would a sight draft usually be used? - [ ] For long-term credits - [x] In international trade transactions - [ ] For corporate bond issuance - [ ] In fixed-asset procurement > **Explanation:** Sight drafts are commonly used in international trade transactions to ensure that the seller receives prompt payment upon the presentation of documents that prove shipment. ### Who typically issues a sight draft? - [ ] The buyer - [ ] The intermediary bank - [x] The seller - [ ] The customs office > **Explanation:** The seller typically issues a sight draft and sends it via their bank to demand immediate payment from the buyer upon document presentation. ### What can cause a sight draft to be dishonored? - [x] The buyer refuses to pay upon presentation. - [ ] The draft is presented before the goods are shipped. - [ ] The buyer makes a partial payment. - [ ] The seller requests it after consignment. > **Explanation:** A sight draft is dishonored if the buyer refuses to pay upon its presentation, thus preventing the release of the shipping documents. ### Which of the following is a primary benefit of using a sight draft for sellers? - [x] Ensures prompt payment upon document presentation - [ ] Allows flexible payment terms - [ ] Protects the buyer's investment - [ ] Guarantees the lowest financial costs > **Explanation:** Sellers benefit from using sight drafts because it ensures prompt payment once the documents confirming shipment are presented. ### Can a sight draft be used domestically? - [x] Yes, but it is less common. - [ ] No, it is exclusively for international trade. - [ ] Only within the same continent - [ ] Only for American transactions > **Explanation:** While sight drafts can be used domestically, they are more commonly used in international trade transactions. ### What documents are typically involved in a sight draft transaction? - [ ] Property deeds - [ ] Personal identification documents - [ ] Stocks and bonds certificates - [x] Shipping and transport documents > **Explanation:** Shipping and transport documents are typically involved in sight draft transactions to confirm the shipment of goods. ### Who holds the shipping documents until the sight draft is paid? - [ ] The seller - [x] The intermediary bank - [ ] The buyer - [ ] The shipping company > **Explanation:** The intermediary bank holds the shipping documents and releases them to the buyer only upon payment of the sight draft. ### What happens to the sight draft once payment is made? - [x] It is marked as paid and returned to the drawee. - [ ] It is destroyed. - [ ] It is kept by the intermediary bank. - [ ] It becomes null and void. > **Explanation:** Once payment is made, the sight draft is marked as paid and typically returned to the drawee. ### What role does the buyer's bank play in a sight draft transaction? - [ ] Ensures a deferred payment schedule - [ ] Stocks the necessary commodities - [x] Presents the documents to the buyer and ensures payment - [ ] Charges interest on transactions > **Explanation:** The buyer’s bank presents the documents to the buyer and ensures payment for the sight draft upon presentation.

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