What is a 'Time Draft'

A time draft is a form of payment that is guaranteed by an issuing bank, but is not payable in full until a specified amount of time after it is received and accepted. Time drafts are a type of short-term credit used for financing transactions of goods in international trade. They allow the buyer a delay in payment after accepting a shipment of exported goods. A time draft contrasts with a sight draft, which requires immediate payment.

BREAKING DOWN 'Time Draft'

The purpose of time drafts is to facilitate international trade. When an exporter receives an order from an unknown importer (or with which it has little credit history) in another country, the importer can apply for a banker's acceptance, which substitutes the bank's credit for the importer's credit. The time draft is post-dated so that payment does not occur until a specified date in order to allow the importer time to receive its ordered goods and confirm satisfaction. After the issuance of the banker's acceptance, the exporter now possesses a promise of payment from the financial institution. It can hold this asset until maturity and be paid in full, or sell it before maturity at a discount to obtain earlier access to the funds. The time between acceptance and maturity is called "tenor" or "usance." As such, time drafts may be referred to as "usance drafts."

Time Draft Illustration

Suppose a manufacturer of high tech hardware based in Texas needs electrical components from a supplier in Taiwan. This Taiwanese company has never done business with this U.S. manufacturer. To carry forth the transaction, the importer in Texas presents a time draft (with a two-month post-date for payment) to a large global bank with a branch office in Taipei, Taiwan, which then accepts it, thus officially creating a banker's acceptance. The exporter in Taiwan ships the order of electrical components and decides to hold the banker's acceptance until maturity instead of selling it at discount prior to maturity.

RELATED TERMS
  1. Bank Endorsement

    A bank endorsement is an endorsement by a bank for a negotiable ...
  2. Bank Draft

    A bank draft is a type of check where payment is guaranteed by ...
  3. Demand Draft

    A demand draft is a method used by individuals to make transfer ...
  4. Foreign Draft

    A foreign draft is an alternative to foreign currency.
  5. Treasurer's Draft

    A treasurer's draft is a type of bank draft that is payable through ...
  6. Banker's Acceptance - BA

    A banker's acceptance (BA) is a short-term debt instrument issued ...
Related Articles
  1. Managing Wealth

    7 Reasons To Review Or Revise Your Will

    Drafting a will and locking it away for good could negatively affect your beneficiaries.
  2. Personal Finance

    What do investment bankers really do?

    Investment bankers are essentially corporate financial advisors who help companies manage the process of raising financing for their activities. Check out more on their roles in banking industry.
  3. Investing

    3 Investment Lessons I Learned From Fantasy Football

    Fantasy football lessons regarding past performance, diversification and behavioral biases can also help with your investing strategy.
  4. Personal Finance

    The 5 Dumbest Financial Moves You Can Make

    Have you made any of these financial mistakes? Here's what not to do.
  5. Small Business

    Emergency Planning for Small Business Owners

    Every small business needs a contingency plan in place to prepare for an unexpected emergency.
  6. Personal Finance

    Investment Banker: Job Description & Average Salary

    Identify what investment bankers do in a typical work day, learn what skills are needed to be successful and understand how investment bankers get paid.
  7. Personal Finance

    Is a Career in Investment Banking Worth It?

    Discover why many finance professionals are wondering whether an investment banking career is worth it. Consider the challenges of this profession.
  8. Investing

    Report: Snapchat Parent Hires Banks for IPO

    Perhaps inevitably, the company behind hot messaging app Snapchat has apparently taken an important step toward its initial public offering: The New York Times reports, citing "people briefed ...
  9. Personal Finance

    Career Advice: Investment Banking Vs. Private Banking

    Examine the two potential career options of investment banking and private banking, with an eye toward choosing the most suitable career.
  10. Personal Finance

    Private banker: Career path and qualifications

    Discover what kind of work private bankers do, and learn more about how you can develop the experience and qualifications required to work in the field.
RELATED FAQS
  1. How can I cancel a bank draft that I have purchased?

    Learn about a bank draft, how it works, the circumstances under which a bank draft may be cancelled, and what the cancellation ... Read Answer >>
  2. What Are Short-Term Investment Options?

    If you only have a short period of time in which to invest your money, there are several short-term investment options you ... Read Answer >>
  3. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center