What Is a Sight Draft?
A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them. Sight drafts are used with both air shipments and ocean shipments for financing transactions of goods in international trade. Unlike a time draft, which allows for a short-term delay in payment after the importer receives the goods, a sight draft is payable immediately.
Sight Draft Explained
A shortcoming of sight drafts is that if the importing country disallows the shipment or the importer is unable to pay for the shipment when it arrives, the exporter will not get paid and will be responsible for return shipping or disposal costs. Sight drafts must be accompanied by a letter of credit and other required documents, such as an ocean bill of lading, in order to be paid.
If a seller wished to retain title to a shipment until it reached its final destination and is subsequently paid for, a sight draft would be the preferred method of exchange. A couple of differences exist for goods shipped by sea and air.
When shipping by water, before cargo can be released, an original ocean bill of lading must be properly signed by the buyer and surrendered to the carrier, since it is the document proving title. On the other hand, air waybills of lading do not need to be presented in order for the buyer to take title to goods. Thus, there is a greater risk when a sight draft is used with a shipment made by air.