Bank Drafts Explained for Finance Professionals
A bank draft, also known as a banker’s draft or a cashier’s check, is a financial instrument issued by a bank on behalf of a customer. It serves as a secure method of payment, especially in situations where the payee requires a guaranteed form of payment. Bank drafts are commonly used for large transactions, real estate transactions, or in situations where the payee may not accept personal checks due to concerns about the check bouncing.
Definition of Bank Drafts
Bank drafts bring an added layer of security, though they can slow the sales process down. Still, if businesses use bank drafts on a selective basis they can be helpful when making unusually large transactions. For example, drafts can be ideal when a customer purchases a large-ticket item such as a car or a down payment for real estate property. But depending on your business, you might ask clients to pay with a draft when purchasing large volumes of products or when paying for a larger project. Similarly, your suppliers may ask you to pay with a bank draft when ordering new inventory. The funds are pulled from the payer’s account, but it’s the bank’s name and information on the cashier’s check.
Basic Bank Drafts
When choosing which payment method to use, the main consideration is the amount of money you need to transfer. Bank drafts are generally recommended for big amounts, i.e., several thousand dollars. Another advantage of a bank draft is that it is a much easier and more convenient method for transferring a large sum of money than withdrawing a large sum of cash.
- You’ll simply need the recipient’s banking data to make the transfer, though if you transfer funds between different financial institutions you’ll have to pay an additional fee.
- However, a few days later, the seller discovered that the bank draft was fraudulent, and the funds were never deposited into their account.
- While both banker’s drafts and certified checks offer a higher level of payment security compared to personal checks, there is a notable difference.
- Send an Interac e-Transfer, all you need is the recipients email address or cell phone number.
- When choosing which payment method to use, the main consideration is the amount of money you need to transfer.
International Transfers
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Also known as an automatic payment, automatic bill pay, and other terms, this type of draft differs in that no paper check is ever issued. This type of draft is most often bank draft definition used to pay for utilities, mortgage, insurance, and other important bills. Despite the guarantee of payment in cases where a bank draft is legitimate, this form of payment is sometimes the subject of fraud.
Step-by-Step Process of Using a Bank Draft
In such cases, the buyer can lose a lot of money, especially since bank drafts are generally used for larger purchases. A bank draft is difficult to cancel since the funds have already been withdrawn from the buyer’s account and transferred into the bank’s reserve account. However, if the bank can confirm that the bank draft has not been cashed out by the payee, it might agree to cancel the bank draft and refund the buyer’s account. First, the individual making the payment submits a request for a bank draft with their financial institution. Once the request is submitted, the bank reviews the individual’s account to see if he or she has sufficient funds to transfer. Most checks take several days before you receive funds in your account.
- They felt reassured that their payment was secure and that they had proof of payment in case any issues arose during the transaction.
- A bank draft is a payment instrument that is issued by a bank, guaranteeing the payment of a specific amount of money to the payee.
- Invoice scanning is the process of turning paper invoices or PDFs into structured, digital data that your business can actually use.
- However, a bank draft should be treated like cash in every other way because there may be consequences if it’s lost or stolen.
Money Orders: When and Where to Get One, and How to Cash One In
This factor is particularly beneficial for large transactions, where the risk is higher. An international bank draft is called a “foreign draft.” Similarly, the sender needs to go to their bank to request a foreign draft for the funds in the necessary currency. A growing number of personal finance apps allow users to send money between users quickly and securely. There may be a fee depending on the type of service you use, however, and some apps may limit your transfers or hold funds if you attempt to transfer a large amount all at once. A more secure payment option can protect you and your business from scams. Customers may likewise appreciate the ability to send a check by mail without including their sensitive bank account information.
How to Choose the Best Solution for Document Automation
The first case is when the issuing bank goes bankrupt, so that it is not honoring any outstanding drafts. The second case is when the draft is fraudulent, and so was not actually prepared by a bank. An example of a bank draft would be if you needed to send a large amount of money to someone overseas.
Understanding Invoice Numbers: Definition and Importance
Typically, the document is made official from a signature by the cashier, hence the name. One of the primary security measures is the use of specialized paper that is difficult to replicate. This paper often contains watermarks and chemical sensitivities that react to attempts at alteration.
However, money orders might not be an acceptable form of payment, so ask the recipient first. They are responsible for the verification of the customer’s funds, the issuance of the draft, and the final settlement of the transaction. Financial institutions must adhere to strict regulatory standards to prevent fraud and ensure the legitimacy of the draft.
A bank issues a bank draft when one of its depositors (a person who holds an account in such bank) requests one using the following steps. First, the bank checks to depositor’s account to make sure the funds are available for transfer. After the funds have been validated, the bank transfers the money from the depositor’s account to the bank. This is what makes these drafts more reliable than other forms of payments; as the bank already has the money that will be paid and the document is backed by a reputed financial institution.