Key Takeaways
- A foreign draft is a bank draft drawn on a foreign bank for transactions in that currency.
- It serves as an alternative to purchasing foreign currency or wiring money internationally.
- Foreign drafts include fees and can ease the complexity of international transactions.
- They often require less information than wire transfers and speed up fund access.
- Foreign drafts help avoid exchange fees and delays, enhancing efficiency in payments.
What Is a Foreign Draft?
A foreign draft is an alternative to traditional currency exchange that allows payments to be made through a bank draft drawn on a foreign financial institution. It is commonly used in international trade and finance because it offers a secure, efficient way to transfer funds. One benefit is the potential to avoid high currency conversion fees, though banks usually charge a service fee to issue the draft.
Important
If it is too expensive or cumbersome to obtain the foreign currency needed for an international transaction, a foreign draft can be used to establish a credit account in that country, denominated in the local currency, which can then be used as payment.
Understanding the Mechanics of Foreign Drafts
A foreign draft is basically a bill of exchange that is drawn in one country and made payable in another country. A bill of exchange is a written order, used mostly in international trade, that binds one party to pay a fixed sum of money to another party on demand, or at a predetermined date.
In particular, the bill of exchange here takes the form of a bank draft—a credit instrument where the issuing bank guarantees payment after reviewing the issuing account for sufficient funds. Obtaining a bank draft requires depositing funds equal to the check amount and applicable fees with the issuing bank. The bank creates a check to the payee drawn on the bank’s account. The check notes the remitter’s name, but the bank appears as the entity making the payment.
If it is too expensive or cumbersome to obtain the foreign currency needed for an international transaction, a foreign draft can be used to establish a credit account in that country, denominated in the local currency, which can then be used as payment. The sender can then repay the bank for the draft amount in their own home currency, subject to fees and exchange rate spreads.
A foreign draft is thus a handy tool that facilitates the transfer of funds that originate in one country, as one currency. into another currency, in another country, either on demand or at a predetermined rate.
Key Uses and Considerations for Foreign Drafts
Foreign drafts are generally used to send money to a foreign country. Foreign drafts mitigate the effects of exchange fees, and bank routing delays, so this method is cheaper and more efficient than sending the currency itself. It also enables the receiver to access the funds quicker than if a draft or check were written in U.S. currency.
A foreign draft also requires less information (such as the routing transit number) on the purchasers part than a wire transfer. Remittances and ad-hoc payments to suppliers or vendors are some examples of when a foreign draft may be used.
The Bottom Line
A foreign draft is a bank draft drawn on a foreign bank that allows international payments without directly purchasing foreign currency. It serves as a convenient alternative to wire transfers, though it involves fees and requires repayment in the sender’s home currency. By reducing exchange-related charges and routing delays, it can simplify cross-border transactions.
