A foreign draft is a type of bank draft that can serve as the means of tendering payments in something other than domestic currency. With this particular approach, the draft is denominated in a specified currency and presented for payment in much the same fashion as any type of check or other draft instrument. The receiving bank will convert the currency based on the current rate of exchange and complete the deposit. This approach is often used by businesses that operate in a number of nations, allowing clients in those countries to pay for services rendered using their own national currencies.
With a foreign draft, the transaction is initiated by choosing the currency to be used and using a financial institution that is based in the nation associated with that currency. Typically, the individual or firm initiating the draft will pay some sort of fee for the service, with the amount of the fee based on the type of account that is held with that particular banking operation. Once the draft is prepared, it can then be forwarded electronically to the recipient. That recipient can then forward the draft to his or her bank, where is it converted into the currency in common use in that nation and deposited into the customer account. Typically, the rate of exchange as of the date of the issue of the foreign draft is used for the currency conversion.
There are several benefits to using a foreign draft. For customers, this process avoids the necessity of incurring the time and expense of making the currency conversion at that end of the transaction. The draft is prepared in local currency and IS then forwarded to the institution specified by the client, usually using details such as the routing transfer number and the account number of the recipient. This approach is not only safer than mailing a paper check, but also allows the funds to be received and posted to the client account much faster, which in turn can mean avoiding interest or other fees that could accrue on that account if the payment was received after the due date.
Providers also benefit from accepting a foreign draft from an international customer. This approach helps to ensure the turnaround between sending the invoice and receiving payment is kept to a minimum. As a result, cash flow is faster and there is less of a possibility of the accounts receivables to have a larger number of invoices that remain open past the 30-day mark. While there are usually some charges for both issuing the foreign draft and for processing it on the other end, the faster processing of the payment usually offset the costs incurred by both the sender and the recipient.