Understanding Draft Processing

Many economies throughout the world use drafts as a payment method. The details vary country by country.

Supplier-initiated drafts, which are prepared by the supplier, are sometimes called bills of exchange. The supplier specifies the due date, whether the draft is to be discounted, and the remittance procedure (paper, EFT, or Electronic Data Interchange (EDI)). Typically, the supplier's bank submits the draft to the customer's bank for processing.

Customer-initiated drafts, which are usually, but not always prepared by the customer, are sometimes called bills of order or promissory notes. The customer specifies the due date and when the customer is to remit payment. The drafts are sent preapproved to the supplier, who must either accept or refuse the draft. The customer decides whether or not the draft is to be discounted and the remittance procedure (paper, EFT, or EDI).

Both types of drafts involve an obligation on the part of the buyer to pay the seller a particular sum on a given date. The drafts are redeemable on or after their stated due date, and it is common for both types of drafts to be redeemed before their due date at a discounted amount.