When exporters make a drawing under a letter of credit, the
presented documents (bill of lading, invoice, packing list, certificate
of origin, etc.) should usually be accompanied by a draft, which is
basically a check, representing demand for payment. The draft or
Bill of Exchange is drawn and signed by the exporter (seller). The
terms of the draft are “at sight” or a number of days after sight or
after the bill of lading date.
Hence, the draft (especially the usance draft) is the instrument used
to demand payment.
“At sight” means that the draft is paid upon receipt of the
documents which are found to be conforming. The terms, which
specify a number of days after sight or after the B/L date, are
commonly called “usance”, indicating that the issuing bank is
obligated to pay the beneficiary (exporter) at some specific future
date. For usance drafts, the obligation to pay begins when the
drawee bank “accepts” the draft and a banker’s acceptance are
created.
The letter of credit specifies on which bank the draft is to be drawn.
For export letters of credit where the beneficiary is a U.S. exporter,
the drawee is usually either the issuing bank or the issuing bank’s
designated U.S. reimbursing bank (in very rare cases the drawee
can be the buyer). Letters of credit in the SWIFT format specify the
drawee bank in section 42D (refer to our reference webpage
dedicated to SWIFT communications.). When the drawee bank is
the issuing bank’s designated US reimbursing bank, this bank’s
name is repeated in section 53A, sender’s correspondent bank.
For example, BNL Bank may issue a letter of credit advised through
Bank of America to one of Bank of America’s customers. The letter
of credit may call for the drafts to be drawn on another US Bank.
The letter of credit may spell out the name of the drawee bank or
quite often just use the SWIFT code for that bank. If the SWIFT
code is not clear as to the actual name of the drawee bank, you
need to contact the buyer to confirm this information.
The parties specified on the draft or Bill of Exchange are:
1. The exporter (beneficiary of the letter of credit) is the drawer of
the draft. The exporter’s company name must be exactly as it
appears in the letter of credit. The exporter signs the draft.
2. The importer (account party in the L/C) is the buyer of the
merchandise under the export commercial letter of credit.
3. The payee (“pay to the order of”) may be the beneficiary
(exporter) of the L/C or its designated negotiating bank. If the
exporter is the payee on the draft, then the draft must be endorsed
to the negotiating bank. It is usually easier to show the negotiating
bank as the payee.
4. The draft is addressed TO the drawee bank, which may be the
issuing bank or its designated US reimbursing bank (or in rare
cases the buyer). Under the printed draft form, the DRAWN UNDER
space details the issuing bank’s name (at the top of the SWIFT),
the issuing bank’s L/C number (see SWIFT section 20), and the
date which that L/C was issued in the foreign country (see SWIFT
section 31D).
European credits usually do not call for drafts because a stamp tax
on drafts in Europe is common. Usance credits in Europe usually
take the form of a deferred payment credit with no draft required.
A draft cannot have any corrections, deletions or erasures. If the
draft does, then the document-examining bank will note a
discrepancy.
Although drafts are similar to checks, they do not possess any
special characteristics such as micro encoding and thus the easiest
method of preparing drafts is to use your PC.
The printed draft form provides an original and a carbon copy which
differs only in that the original states “THIS FIRST BILL OF
EXCHANGE (SECOND UNPAID)” and the carbon copy states “THIS
SECOND BILL OF EXCHANGE (FIRST UNPAID)”. The reason for
the two drafts goes back to the days when the documents were sent
in separate mailings in the event that one became lost.
