Bank Draft

What is a Bank Draft?

A Bank draft is a Financial Instrument that is used in the form of a payment done on the payer’s behalf and is guaranteed by the bank that is issuing it. Generally, banks review the draft requester’s account to figure out if there is enough amount for the clearance of the cheque.

Once the confirmation is done, the bank that keeps this amount aside from the person’s account so that it could be given whenever the draft is being used. And, after using this draft, the same amount of money gets deducted from the account of the person.

How does a Bank Draft Work?

Acquiring a bank draft demands that the payer has deposited funds equal to the amount on the cheque along with the applicable fees charged by the issuing bank. The bank then creates a cheque to the payee that can be withdrawn from the own account of the bank.

The cheque has the payer’s name; however, the bank is the institution that is making the payment here. And then, this cheque gets signed by either the bank officer or the cashier. Since the money is issued by the bank, a bank draft offers the guarantee regarding the Underlying funds being available.

Sellers or buyers make or need payments through bank drafts in the form of a secure payment method. Also, once the bank draft has been arranged, it is generally not possible to stop or cancel the payment. However, if the draft gets destroyed, stolen or lost, it can be replaced or cancelled accordingly.

Bank Draft Example

Let’s take a bank draft example here. To clear out, a bank draft can still be needed by a seller even when he doesn’t have any relationship with the buyer. This sort of transaction comprises a huge sale price; or else the seller may believe that collecting the payment could turn out to be difficult.

For instance, a seller requires a bank draft while selling an automobile. Of course, in such a scenario, the seller may not be able to collect the funds in case the bank turns out to be insolvent or doesn’t have the outstanding draft amount. The situation may also apply during the time if the draft is nothing less than fraudulent.