What Is a Foreign Draft?
A foreign draft is an alternative to foreign currency when dealing with international trade or finance. A foreign draft is essentially a bank draft that is drawn on a financial institution in the non-home country of the currency needed. These can be purchased at commercial banks and usually come with a fee depending on the institution and the type of account you hold.
If it is too expensive or cumbersome to obtain the foreign currency needed for an international transaction, a foreign draft can be used to establish a credit account in that country, denominated in the local currency, which can then be used as payment.
How Foreign Drafts Work
A foreign draft is basically a bill of exchange that is drawn in one country and made payable in another country. A bill of exchange is a written order that is used to, mostly in international trade, that binds one party to pay a fixed sum of money to another party on demand, or at a predetermined date.
In particular, the bill of exchange here takes the form of a bank draft—a credit instrument where the issuing bank guarantees payment after reviewing the issuing account for sufficient funds. 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 account. The check notes the remitter’s name, but the bank appears as the entity making the payment.
If it is too expensive or cumbersome to obtain the foreign currency needed for an international transaction, a foreign draft can be used to establish a credit account in that country, denominated in the local currency, which can then be used as payment. The sender can then repay the bank for the draft amount in their own home currency, subject to fees and exchange rate spreads.
A foreign draft is thus a handy tool that facilitates the transfer of funds that originate in one country, as one currency into another currency, in another country, either on demand or at a predetermined rate.
- A foreign draft is a bank draft established at a foreign bank in order to pay a transaction in the foreign currency.
- A foreign draft forgoes the need to purchase foreign currency or volunteer information required for an international wire.
- Foreign drafts come with fees that must be paid to the foreign bank.
Special Considerations: The Uses of a Foreign Draft
Foreign drafts are generally used to send money to a foreign country. Foreign drafts mitigate the effects of exchange fees, and bank routing delays, so this method is cheaper and more efficient than sending the currency itself. It also enables the receiver to access the funds quicker than if a draft or check were written in U.S. currency.
A foreign draft also requires less information (such as the routing transit number) on the purchasers part than a wire transfer. Remittances and ad-hoc payments to suppliers or vendors are some examples of when a foreign draft may be used.