Loading the player...

What is a 'Bank Draft'

A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. Typically, banks will review the bank draft requester's account to see if sufficient funds are available for the check to clear. Once it has been confirmed that sufficient funds are available, the bank effectively sets aside the funds from the person's account to be given out when the bank draft is used. A draft ensures the payee a secure form of payment. During a payer’s reconciliation of his bank account, he notices a decrease in the account balance because of the money withdrawn from the account.

BREAKING DOWN 'Bank Draft'

Obtaining a bank draft requires depositing funds equal to the check amount and applicable fees with the issuing bank. The bank creates a check to the payee drawn on the bank’s own account. The remitter’s name is noted on the check, but the bank is the entity making the payment. A bank cashier or officer signs the check.

Because the money is drawn upon and issued by a bank, a bank draft guarantees the availability of the underlying funds. Buyers or sellers make or require payments through bank drafts as a secure method of payment.

Bank Draft Examples

A bank draft is required by a seller when the seller has no relationship with the buyer; a transaction involves a large sale price; or the seller believes collecting payment may be difficult. For example, a seller requires a bank draft when selling a home or automobile. A seller might not collect funds with a bank draft if the bank becomes insolvent and does not honor outstanding drafts, or if the draft is fraudulent.

Bank Draft and Money Order Similarities and Differences

A bank draft and a money order are both prepaid, with a specified and printed amount. Each is considered a secure method of payment from a third-party institution. The payer does not need to carry large amounts of money when using a bank draft or money order. However, a bank draft is a check drawn on a bank’s funds after accepting the amount from the issuer’s account, whereas cash is used when purchasing a money order. For this reason, a money order is more secure than a bank draft.

Only a bank may issue a bank draft, while any approved institution, such as a certified store, post office or bank, can issue a money order. Since money orders are often used in money laundering, many governments limit how much money can be converted into a money order. Bank draft amounts can be much higher. Due to the limited amounts printed on money orders, and the process banks go through when issuing drafts, money orders cost less than bank drafts. Obtaining a bank draft is more difficult than obtaining a money order because the payer must go to his bank to purchase the draft, rather than using one of the more accessible institutions.

RELATED TERMS
  1. Share Draft

    A share draft is a type of draft, which credit unions use, as ...
  2. Acceptance

    An acceptance is a contractual agreement on a time draft or sight ...
  3. Time Draft

    A type of foreign check that is guaranteed by the issuing bank, ...
  4. Bank Endorsement

    A bank endorsement is an endorsement by a bank for a negotiable ...
  5. Payable Through Draft

    A draft that is payable through a specific bank. Payable-through-draft ...
  6. Nonpar Item

    A check, draft or negotiable instrument that a paying bank honors ...
Related Articles
  1. Investing

    Bill of Exchange

    A bill of exchange is a document used in international trade to pay for goods or services. It is signed by the person promising to pay, and given to the person entitled to receive the money. ...
  2. Personal Finance

    Retail Banking vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking refers to the aspect of banking that deals with corporate customers.
  3. Personal Finance

    8 Low-Cost Ways To Transfer Money

    If cost is your primary concern, there are several cheap(er) ways to move funds.
  4. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  5. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
RELATED FAQS
  1. Where on the Internet can I find free sample templates for a bill of exchange?

    Understand the concept behind a bill of exchange, and learn about websites on the Internet where you can find free sample ... Read Answer >>
  2. What is the average profit margin for a company in the banking sector?

    Learn what the average profit margin is for companies in the banking sector, along with other evaluation metrics often used ... Read Answer >>
  3. What are the differences between preference shares and bonds?

    Learn what information banks keep on file for their customers, and understand how this information can be used to deny an ... Read Answer >>
  4. What is the banking sector?

    Why the banking sector is a vital industry, what it does to drive economic growth and examples of companies in this sector. Read Answer >>
Trading Center