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.

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."

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.