A draft is a means of payment used for payment, either in local currency or in foreign currency. The payment of the draft is guaranteed by the bank or the financial institution. The draft is generally termed a bank draft. It is a cheque drawn by the bank on its funds. It can be issued for both local and foreign parties. The bank where the payee deposits the draft also refers to it as a bill purchased (BP). It is recognized as a security by the payee for whom it has been issued by its drawer.
Under the draft system, the drawer of the draft his/her bank, either by providing cash or by allowing the bank to deduct the draft amount from his/her account. It is an order from the issuing bank to the paying bank to make the payment to the name mentioned. In precise, a bank draft is the written order which is given by one branch of bank to another branch, or even by one bank to another, for a certain amount. This is one of the common and reliable means of payment used locally or internationally.
Key Advantages of Draft
It provides additional security to the creditors or payee compared to a cheque
A draft can be issued in all major convertible currencies
It is easy means of payment as the payee’s account details need not be known by the payer
Under certain circumstances, it can cost lower than electronic fund transfer
Difference Between Draft and Cheque
| Basis of Difference | Draft | Cheque |
| Meaning | It is a pre-paid means of payment where the drawee bank guarantees to make the payment in full when it is presented for payment. | It is a written order to make payment of a certain sum of money to the person or institution or the bearer of the cheque by the depositor. |
| Drawee | It is drawn by the bank to its branch or any other bank. | An account holder of a bank can draw a cheque. |
| Parties | Both parties i.e. drawer and drawee are banks. | The drawer and payee are different persons in a cheque. |
| Need of Signature | No signature is needed to transfer the fund. | A signature is a must to transfer funds. |
| Payment Stop | Payment cannot be stopped in the draft once it is issued. | Payment of a cheque can be stopped by the drawee. |
