Sight drafts are financial instruments that are payable on demand, once presented by the payee. This is in contrast to the time draft, where the instrument cannot be honored until a specified date in the future. It is not unusual for an exporter to utilize a sight draft as the most expedient form of payment when arranging the shipment of goods to a customer based at an international location.
In some cases, a sight draft is included along with all other documents that are relevant to the shipment. For example, the draft may be included along with copies of the negotiation documents that outline the terms of the sale. Any contracts, shipping instructions, or documents necessary for customs purposes will also accompany the draft. This provides the exporter with everything that is needed to finalize the preparation and shipment of the customer’s order.
One of the main benefits of the sight draft is that the document allows the exporter to be assured of payment for the shipment. At the same time, the exporter has the opportunity to review the accompanying documents, and make sure that the expectations of the customer are in harmony with the outcome of the order negotiations. If there is any difference between the documents, the issue can be resolved before the shipment leaves the home port. For instance, if the negotiation documents show one price for the order and the draft shows a different figure, it is possible to reconcile the issue before anything is shipped. Ultimately, this saves both the exporter and the recipient a great deal of time and trouble.
While a sight draft is defined as a pay on demand document, that does not necessarily mean that the draft is honored immediately. In most cases, the bank receiving the draft will take some time to verify the document, along with another other documents that are presented with the sight draft. Any apparent issues with the documents are reported to the payee as they are discovered, making it possible to contact the client and take whatever measures are necessary to resolve the situation. If everything is in order, the payee will receive full credit for the funds within one to three business days. In some situations where the bank and the presenter of the draft have established an ongoing working relationship, the funds may be made available in a matter of hours instead of days.