What it means
An ordinary cheque is a promise by the customer that their account will cover it; the recipient bears the risk that it will not. A bank draft removes that risk by making the bank the promisor.
The customer's account is debited when the draft is issued, the bank holds the money, and the draft is honoured from the bank's own funds when presented. For the recipient, a draft from a reputable bank is as good as cash, subject to the draft being genuine.
Drafts are used where certainty of payment matters and the parties are not set up for, or do not trust, electronic transfer. Historically they were the standard instrument for house purchases, car purchases from private sellers, and large deposits.
Electronic same-day transfers have displaced them in much of the world, and many banks now issue drafts only on request and charge for them, but they remain common in some countries and for some transactions, and they are still accepted by solicitors, auction houses and dealers. The main risk with a draft is fraud.
Forged and altered drafts exist, and a fraudster may present a convincing draft for goods, take delivery, and disappear before the bank identifies the forgery, which can take days. Recipients of large drafts should verify them with the issuing bank directly using contact details obtained independently, not from the draft or the presenter, and should wait for confirmed clearance before releasing high-value goods.
A second risk is loss: a draft is a physical instrument, and a lost or stolen draft can be replaced only after an indemnity and a waiting period. In business accounting a draft is simply cash paid or received.
The payer records the outflow when the draft is purchased (the bank debits the account immediately); the recipient records the receipt when the draft is deposited and cleared. Drafts in transit at a period end appear as reconciling items on the bank reconciliation.
In practice
Real-world examples.
Example
A homebuyer's solicitor provides a banker's draft for the purchase balance at completion, in a jurisdiction where the conveyancing practice still uses drafts.
Example
An auction house requires payment for lots over $10,000 by bank draft or electronic transfer, and will not release goods against a personal cheque.
Example
A tenant pays a $6,000 deposit on a commercial lease by draft because the landlord's agent insists on cleared funds before handing over keys.
Think of it
“A bank draft is a check from a bank, not from you-more secure because the bank backs it.
Formula
Calculation
There is no formula, but the cost and the cash timing can be set out.
Total cost to the payer = Draft amount + Bank fee
Worked example. A small company buys a second-hand delivery van from a private seller for $28,500. The seller will not accept a company cheque or wait for a bank transfer to clear, and the company wants to collect the van the same day. The company's bank issues a draft for $28,500 payable to the seller and charges a $25 fee.
- Cash leaving the company's account on issue = $28,525
- Accounting entry on the day of purchase: debit motor vehicles $28,500, debit bank charges $25, credit bank $28,525
- The seller deposits the draft; her bank credits it, typically with funds available within one to three working days depending on the bank's policy for drafts
Reconciliation: if the company's period end falls between issuing the draft and the seller presenting it, the company's ledger shows the $28,525 as paid but the bank statement may show it too (many banks debit the customer on issue) or, for some banks, only when presented. In the latter case the draft appears as an outstanding item on the bank reconciliation until it clears.
Comparison with alternatives: a same-day electronic transfer would cost the company about the same fee and settle within hours, with no physical instrument to lose or forge; a personal cheque would cost nothing but the seller would bear clearing risk and delay. The draft suited this transaction because the seller demanded certainty and the parties were meeting in person.Case study
Seen in the real world.
A car dealer sold a $45,000 vehicle to a buyer who paid with a draft that appeared to be from a major bank. The dealer's sales manager, seeing a bank's name and a security watermark, released the car. Four days later the dealer's bank returned the draft as a forgery; the buyer's details were false and the car was never recovered.
The dealer's insurer declined the claim because the dealer had not followed its own procedure, which required verification of drafts over $10,000 with the issuing bank before release. The dealership changed its practice: drafts are now verified by telephone using the bank's published number, high-value vehicles are released only after the draft has cleared, and the dealer actively steers buyers towards electronic transfer, which settles within an hour and cannot be forged. The sales manager's comment was that the draft had looked more secure than a transfer and had been far less so.
Watch out
Common mistakes.
- Treating any document headed with a bank's name as guaranteed. Forged drafts are a well-known fraud; verify with the issuing bank directly before releasing valuable goods.
- Assuming a deposited draft is available immediately. Banks may hold funds for a few days, and a forgery can be returned after that.
- Losing a draft. Replacement requires an indemnity and can take weeks.
Questions
People also ask.
What is the difference between a bank draft and a certified cheque?
A certified cheque is the customer's own cheque that the bank has certified as covered and earmarked the funds. A bank draft is drawn by the bank on itself. Both are guaranteed; the draft is the more common instrument today.
Can a bank draft be cancelled?
Only with difficulty. Because the bank has committed its own funds, cancellation usually requires the payee's consent or a lost-instrument indemnity.
Is a bank draft safer than a bank transfer?
For the recipient, a verified draft and a completed transfer are both certain. Transfers are faster, cannot be forged and leave an electronic trail, so they have largely replaced drafts where available.
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