As a seller, you always want to ensure that you receive a fast and secure payment from clients. However, sometimes the payment will go wrong or you get scammed, such as when using a cashier’s cheque. There is a likelihood that the cheque will bounce back. So, what are the best options you can accept as payment modes? A bank draft is one of the fastest and most secure modes of payment, and it is highly recommended for sellers and payers alike as the bank guarantees the payment. So, what is a bank draft? This article highlights what it is, how it works, and its benefits.
What Is A Bank Draft?
A bank draft is a payment made by the payer but is guaranteed by the issuing bank. In most instances, the bank will probably review the requester of the draft to establish whether he or she has enough funds for the check to clear. Therefore, there is no need for the recipient to worry about accepting the payment since the issuing bank guarantees the payment.
Once the bank has confirmed that there are adequate funds in the individual’s account, the bank then sets aside the funds from the person’s bank account to be given out once the bank draft is used. Therefore, the draft is of great significance since it ensures that the payee has a secure form of payment. The bank also decreases the payee’s bank account with the same amount of money withdrawn.
Breaking Down What A “Bank Draft” Is
If you get a draft, the issuing bank requires that you have enough funds in your bank account. Therefore, ensure you have already deposited money equal to the check amount along with the applicable fees. The payer is also referred to as the remitter, and his or her name is noted on the check, but the bank is the entity that will remit the payment. Therefore, instead of the payee signing the check, the issuing bank’s cashier or officer signs it. You should note that a draft works similarly to the cashier’s check.
Since the money is drawn upon and subsequently issued by the bank, a draft does not bounce back once remitted as the bank guarantees the availability of the funds. Sellers and buyers alike make or require payments via drafts since it is a secure mode of payment.
How Does A Bank Draft Work?
You may go to your credit union or bank and request a bank draft. It is just like asking them to write a check they guarantee payment on. If you give a person an option of either accepting payment through a check or a draft, they are more likely to go with the latter as the individuals are certain that the draft will not bounce. This is what makes it a secure mode of payment.
For instance, if you want a car after just completing college, but you do not have money, a bank draft can be handy. Since you are unemployed as you have just left college and will probably not land a good job that can help you purchase the car, you may sweet talk your parents to buy you one. So, you talk to your parents, and they agree to purchase the car.
So, you approach a car dealer to choose one of the best sedans to show off to your friends. Your preference of Chevrolet brand gets the better of you and you opt to buy a Chevrolet sedan at $13,000. You then talk to your parents about your decision. They deposit the money. However, you do not want to pay cash, so you write a cheque.
However, once you take the cheque to the car dealer, they immediately refuse. You wonder why and enquire why they refused and if there are other payment options. The car dealer says you are a stranger, and there is a possibility that the cheque will bounce back. They say they can only accept a bank draft. You head to the bank and ask the bank for a draft.
They check your account and see you have $13,560 in your account. So, they accept writing you the draft. You take the draft to the car dealer, and they straight away accept your offer. You take your car and drive away. The car dealer accepts the draft because it cannot bounce back, and the bank guarantees that the amount will be remitted.
The car dealer refuses the cheque since it could bounce back and the dealer does not know you. Therefore, the car dealer feels safe with the draft compared to the cheque. You check your account balance and note you have an available balance of $560. This implies that the bank has put the $13,000 on hold until the payment of your sedan is completed.
The draft works because the car dealer knows the bank will complete the payment. The car dealer prefers the draft because you have no relationship with him and the deal involves a large amount of money. In addition, the dealer may have concerns that collecting the payment could be difficult, and he might lose the amount. Therefore, the draft provides the needed security in this example. He does not fear getting scammed because the bank remits the needed amount.
You Need To Have The Funds In Your Account
The bank cannot be tricked. If you want a bank draft of a certain amount, then you should have that amount in your bank account already. You should also pay for the fees involved for the bank to write the draft. However, the fee can be taken out in your next statement, although they may take the fee right away. This implies that you need to have sufficient funds in your bank account to cover the fee. The draft is just having your bank write a check for you. However, you cannot hand out a draft to anybody. You will need to add the name of the company or person who will receive the draft and cash it.
Benefits And Uses Of Bank Drafts
The draft can represent thousands of dollars. This makes it superior to a money order, which has limits set by the government. Therefore, if making large purchases. You may not pay with a money order. However, you can do so with a bank draft. While a money order is bought with hard cash, a draft is bought with digital money that is currently held in your bank account.
This makes the draft more convenient as you do not have to go through the hassle of carrying the huge amount to a bank so you receive it as is the case with money orders. However, you might use a money order if making less expensive purchases. We recommend using a draft if making expensive purchases.
Bank Guarantees Payment
The issuing bank can guarantee drafts since the payee has already paid. To get the draft, the client should have the funds available, and the bank freezes or keeps the funds on hold until the payment is completed. If you receive money in this mode of payment, the bank has already guaranteed to pay the full amount. Scammers often use cashier cheques to swindle victims, but you will never be a victim of fraud when your paid using bank drafts.
This mode of payment is used whenever safety is important, especially for large transactions. Drafts are safer than cheques when accepting payments.
Fast Mode Of Payment
While cheques usually take several days to move through the banks, drafts will ensure that you receive the amount within a business day. Receiving a cheque does not imply that you have received and can withdraw the funds, as it will take time to approve, unlike drafts where you will withdraw within a day. It is unlikely that the bank will reverse the deposit.
Bank drafts are a secure mode of payment and suit sellers because payment is guaranteed, not by the payee, but by the issuing bank. The money is drawn from the payee’s account and issued by the bank and does not bounce back once remitted. Because the bank guarantees payments, they are readily accepted and are arguably the most secure mode of payment. As a payee, the bank draft is just having your bank write a check for you. The only catch is that you need to have the funds in your bank account.
The bank freezes the funds until the payment is completed. However, you cannot hand out a bank draft to anybody. You will need to add the name of the company or person who will receive the draft and cash it. Drafts offer many more benefits than money orders and cashier’s cheques. You can make expensive purchases, the bank guarantees payment, and they are a safe and fast payment mode. We hope that this article has adequately addressed what a bank draft is, its benefits, and how it works.