Time Draft

A time draft (also called a usance draft or term draft) is a negotiable financial instrument used in international trade that requires the buyer to pay a specified amount at a future date, typically 30, 60, 90, or 180 days after the draft is presented or after the bill of lading date. Unlike a sight draft, which demands immediate payment upon presentation, a time draft gives the buyer a defined credit period. When the buyer formally acknowledges the obligation by writing “accepted” on the draft, it becomes a trade acceptance or banker’s acceptance, depending on who accepts it.

How a Time Draft Transaction Works

The seller ships the goods and draws a time draft on the buyer, instructing payment at a future date. The draft, along with shipping documents (bill of lading, commercial invoice, packing list), is submitted to the seller’s bank. The bank forwards the documents to the buyer’s bank (the collecting bank). The buyer’s bank presents the draft to the buyer for acceptance.

Upon acceptance, the buyer signs the draft, creating a binding obligation to pay on the maturity date. The collecting bank then releases the shipping documents to the buyer, who uses the bill of lading to claim the goods from the carrier. On the maturity date, the buyer makes payment through the banking channel.

This sequence is called a “documents against acceptance” (D/A) collection. It provides the seller with a documented payment obligation while giving the buyer time to receive, inspect, and potentially resell the goods before payment is due.

Time Draft vs. Sight Draft

A sight draft requires the buyer to pay immediately upon presentation of the draft before receiving the shipping documents. A time draft extends credit to the buyer. The choice between the two reflects the risk tolerance of the seller and the negotiating position of the buyer.

Sight drafts offer sellers faster payment and lower credit risk. Time drafts are more attractive to buyers because they can take delivery, generate revenue from the goods, and then pay from the proceeds. Sellers agree to time drafts to remain competitive, especially when dealing with established buyers who expect credit terms or in markets where competitors already offer usance terms.

Banker’s Acceptance

When a bank (rather than the buyer directly) accepts a time draft, it becomes a banker’s acceptance (BA). The bank guarantees payment on the maturity date regardless of the buyer’s financial condition. This dramatically reduces the seller’s credit risk because the obligation shifts from the buyer to a financial institution.

Banker’s acceptances are marketable instruments. The seller can sell a BA to an investor or back to the bank at a discount before maturity, receiving cash immediately rather than waiting for the payment date. The discount rate depends on the accepting bank’s credit rating, the maturity period, and prevailing interest rates. A $100,000 BA maturing in 90 days might be discounted at 3% to 5% annualized, meaning the seller receives approximately $99,250 to $99,625 immediately.

Risks for Sellers

With a trade acceptance (accepted by the buyer, not a bank), the seller’s risk is that the buyer accepts the draft, takes possession of the goods, and then fails to pay at maturity. Unlike a letter of credit, the draft is not backed by a bank guarantee unless it is specifically structured as a banker’s acceptance. The seller’s recourse is to pursue collection through legal channels, which is expensive and uncertain in cross-border transactions.

Sellers can mitigate this risk by requiring a banker’s acceptance instead of a trade acceptance, purchasing trade credit insurance, or limiting time draft terms to buyers with verified creditworthiness and a track record of timely payments.

Use in FBA Supply Chains

Time drafts are not common in typical FBA sourcing, where most transactions between Chinese manufacturers and Amazon sellers are settled by telegraphic transfer (T/T) with a deposit/balance structure. However, as sellers scale and place larger orders with established suppliers, time drafts through a documentary collection can serve as a middle ground between the cost of a letter of credit and the informality of open account terms. A time draft gives the seller a formal instrument and the buyer a defined payment period without the banking fees associated with letters of credit.