Time Draft in Trade Finance Full Guide

A time draft is a written order requiring a specified party to pay a stated amount at a future date or after a defined period of time. In international trade, exporters use time drafts to document deferred-payment obligations owed by importers or banks.

The instrument is also commonly called a usance draft or time bill of exchange. The commercial purpose is straightforward: the seller delivers goods today while payment becomes due later.

The identity of the party that accepts the draft changes its credit characteristics. When the commercial buyer accepts it, the instrument becomes a trade acceptance. When a bank accepts a time draft drawn on that bank, it becomes a banker’s acceptance.

This distinction is especially important for exporters seeking early liquidity. A corporate trade acceptance represents exposure to the buyer. A banker’s acceptance carries the payment obligation of the accepting bank and can therefore have a substantially different discounting market.

The Parties to a Time Draft

Understanding a draft becomes easier once the parties are identified.

A typical draft contains three primary roles:

• Drawer: the party creating and signing the draft, commonly the exporter or seller.
• Drawee: the party instructed to make payment. This can be the importer, issuing bank, nominated bank or another party depending on the structure.
• Payee: the party entitled to receive payment, commonly the exporter or its bank.

The draft states the amount, currency, drawee and payment maturity. The drawer signs it and presents it for acceptance according to the underlying trade arrangement.

The International Chamber of Commerce defines a draft as a written demand for payment addressed to a drawee and signed by the drawer. A draft can require immediate payment at sight or payment at a specified future maturity.

What Does Acceptance of a Time Draft Mean?

Acceptance is the drawee’s formal acknowledgement of the obligation to pay the draft according to its stated terms at maturity.

Traditionally, the drawee writes or stamps “accepted” on the instrument, signs it and records the relevant acceptance date. The accepted draft then represents an enforceable future payment obligation subject to the applicable law and transaction documentation.

The Federal Reserve describes an acceptance as a time draft acknowledged by the drawee. Once accepted, the acceptor assumes an unconditional obligation under the instrument to make the specified payment at maturity.

The accepting party therefore matters enormously. A time draft accepted by an unrated importer carries the buyer’s credit risk. A draft accepted by a well-rated international bank produces a banker’s acceptance and places the accepting bank’s credit behind the payment obligation.

When Does a Time Draft Become a Banker’s Acceptance?

A time draft becomes a banker’s acceptance when the draft is drawn on a bank and that bank formally accepts it.

The Federal Reserve describes a banker’s acceptance as a time draft, also referred to as a bill of exchange or usance draft, drawn on a bank and accepted by that bank for payment at a specified future maturity.

The process therefore begins with a time draft. Bank acceptance is the event that turns the instrument into a banker’s acceptance.

Financely's Banker’s Acceptance Discounting Guide covers the subsequent discounting, pricing, bank-credit and secondary-market mechanics in detail.

Time Draft vs Sight Draft

The maturity distinguishes these two basic draft structures.

A sight draft requires payment when properly presented. A time draft provides a period before payment becomes due.

Financely's separate guide to letters of credit at sight covers the immediate-payment side of documentary trade finance.

How Is the Maturity of a Time Draft Written?

A time draft needs a determinable payment date.

Typical wording can establish maturity through formulations such as:

• 60 days after sight;
• 90 days after sight;
• 90 days after bill of lading date;
• 120 days after shipment;
• 180 days after invoice date; or
• payment on a specified calendar date.

“After sight” generally links the tenor to presentation and acceptance. A draft tied to a bill of lading date or another objective transaction date creates a maturity that can be determined directly from that document.

Clear maturity language matters for discounting because the financing institution needs to know the exact period remaining before payment.

Time Draft vs Date Draft

A time draft can make payment due after a stated period, such as 90 days after acceptance. A date draft specifies an actual payment date.

For example, a shipment made on August 1 might use a draft payable “90 days after sight.” Another transaction could simply require payment on November 15.

The U.S. International Trade Administration notes that a specific-date draft can reduce uncertainty created when maturity depends on how quickly the drawee accepts a time draft.

Time Drafts Under Documentary Letters of Credit

Time drafts have historically been used extensively under usance documentary letters of credit.

UCP 600 distinguishes several methods by which a documentary credit can be made available. Article 6 requires the credit to state whether it is available by sight payment, deferred payment, acceptance or negotiation.

When a documentary letter of credit is available by acceptance, the beneficiary can be required to draw a time draft on the relevant bank. Following a complying presentation, the bank accepts that bill and undertakes to pay at maturity.

Under UCP 600, honour for a credit available by acceptance means accepting the beneficiary's bill of exchange and paying it at maturity.

Financely covers these structures in Types of Usance Letters of Credit and How They Work.

Example of a 90-Day Time Draft Under a Letter of Credit

Assume a European importer purchases $3 million of industrial equipment from an Asian exporter.

The importer arranges an irrevocable documentary letter of credit available by acceptance at 90 days after bill of lading date.

The exporter ships the machinery and presents the required invoice, bill of lading, packing list, insurance documents and a 90-day time draft.

The nominated or issuing bank examines the presentation. Once the presentation complies and the designated bank accepts the draft, the instrument becomes a banker’s acceptance.

The exporter now has a $3 million bank obligation payable in 90 days.

It can hold that banker’s acceptance until maturity or seek immediate liquidity by discounting it with an eligible bank or trade finance provider.

Acceptance and Deferred Payment Are Separate Letter of Credit Structures

A future payment under a letter of credit can also be created through a deferred-payment undertaking.

Under a credit available by deferred payment, the bank incurs a future payment obligation following a complying presentation. The structure can operate without an accepted time draft.

Under a credit available by acceptance, a time draft is drawn and accepted by the designated bank. The accepted draft creates the separate negotiable instrument associated with the banker’s acceptance structure.

Both structures can potentially create financeable future payment obligations. Financely's guide to deferred-payment and usance letters of credit covers the difference in greater detail.

Time Drafts in Documentary Collections

A time draft can also be used outside a documentary letter of credit.

One common structure is a documents against acceptance collection, usually abbreviated D/A.

The exporter ships the goods and forwards the commercial and transport documents through its bank with instructions for the importer’s bank to release the documents after the importer accepts the time draft.

The importer signs the acceptance, receives the documents and can take possession of the goods. Payment becomes due at the future maturity specified by the draft.

The U.S. International Trade Administration describes this as documents against acceptance. The importer’s acceptance creates a legal future payment obligation, while the banks in an ordinary documentary collection act as collection intermediaries rather than providing the payment undertaking associated with a documentary letter of credit.

The Accepted Draft in a D/A Collection Is a Trade Acceptance

When the importer itself accepts a time draft, the resulting instrument is commonly described as a trade acceptance.

The exporter now holds a corporate payment obligation due at maturity.

The credit risk therefore depends heavily on the importer. The exporter has released the commercial documents and potentially control of the goods in exchange for the importer’s promise to pay later.

Documents against acceptance can suit established buyer relationships where the exporter is comfortable extending credit. Transactions involving unfamiliar counterparties, weaker jurisdictions or material amounts may justify stronger bank-supported payment structures.

Banker’s Acceptance Adds Bank Credit to the Time Draft

Bank acceptance changes the party responsible for the accepted instrument.

According to the OCC, when the bank stamps a time draft as accepted under a documentary letter of credit transaction, a banker’s acceptance is created and the bank commits to pay according to the instrument at maturity.

A discounting institution can then analyze the accepting bank's financial strength, jurisdiction, tenor and market limits when deciding whether to purchase the instrument.

This helps explain why banker’s acceptances historically developed an active money-market function in addition to their role in financing individual shipments.

Time Draft vs Trade Acceptance vs Banker’s Acceptance

A Time Draft Can Also Be Avalised

Another structure involves a corporate party accepting the bill while a bank adds an aval or payment guarantee to that obligation.

The corporate buyer remains the primary commercial acceptor, while the bank adds its undertaking according to the applicable bill and aval documentation.

The resulting bank-supported bill can become substantially easier to finance where the avalising bank satisfies the financier’s credit requirements.

Financely's Avalised Bill of Exchange Discounting guide covers the discounting mechanics for this structure.

Can a Time Draft Be Discounted?

Yes. An accepted time draft can potentially be sold or discounted before maturity.

The financing institution pays the holder an amount below the face value of the future obligation. It then receives the full contractual amount at maturity, assuming the obligor performs.

Discounting transforms a deferred trade receivable into immediate working capital.

Pricing depends heavily on who accepted or guaranteed the draft. A banker’s acceptance issued by an approved international bank can produce different pricing from a trade acceptance issued by a middle-market importer.

Financely's usance letter of credit discounting page covers financing against future bank payment obligations created under deferred trade terms.

Example of Time Draft Discounting

Assume an exporter holds a $2.5 million banker’s acceptance with 90 days remaining until maturity.

A financing institution agrees to discount the instrument at a simple annual rate of 7% using a 360-day basis.

The exporter receives approximately $2.456 million immediately and can recycle that cash into another transaction. The holder of the acceptance collects $2.5 million from the accepting bank at maturity.

Actual transactions can include different day-count conventions, funding spreads, bank acceptance commissions, documentary fees and other charges.

Negotiation, Endorsement and Transfer

Bills of exchange have historically been negotiable instruments, allowing payment rights to move from one holder to another through the required endorsement and delivery mechanics.

This characteristic helped make accepted bills useful financing instruments. The exporter could receive a future payment claim and transfer that claim to a financier rather than waiting for maturity.

Modern transactions can also involve separate assignment, purchase or discount agreements. Applicable negotiable-instrument law, electronic documentation rules and contractual restrictions should be reviewed for the relevant jurisdiction.

Transfer mechanics should therefore be established before the exporter assumes that a particular draft can be sold to a third-party financier.

Recourse When a Time Draft Is Discounted

Discounting terms determine what happens if the accepted draft remains unpaid at maturity.

A financier may purchase an accepted corporate draft with recourse to the exporter. The exporter then retains specified repayment obligations if the acceptor fails to pay.

A bank-supported obligation can potentially be purchased with limited ordinary credit recourse where the financier is prepared to assume the designated bank risk.

Representations relating to fraud, authenticity, title, duplicate financing, sanctions and documentary validity commonly remain important regardless of the agreed credit-recourse structure.

Time Draft Discounting vs Receivables Finance

Both structures accelerate payment to an exporter, though the asset being financed differs.

Traditional receivables finance advances or purchases against an invoice owed by the buyer. Time draft discounting finances an accepted bill or draft representing a defined future payment obligation.

A banker’s acceptance adds an accepting bank as the principal obligor under the instrument. Ordinary invoice finance typically relies on the corporate account debtor, credit insurance or other enhancements.

Financely compares the broader structures in Letter of Credit Discounting vs Receivables Finance.

Documentary Discrepancies Can Delay Acceptance

A time draft presented under a documentary letter of credit sits inside the wider documentary presentation.

The beneficiary may also need to present invoices, transport documents, insurance certificates, packing lists, certificates of origin, inspection documents or other documents specified by the credit.

A discrepancy can require waiver or correction before the expected documentary outcome is achieved. Exporters planning to discount the resulting bank obligation should therefore pay close attention to presentation quality.

Financely's Letter of Credit Discrepancy Review Checklist covers common presentation risks before documents reach the bank.

Why Importers Use Time Drafts

Deferred payment gives the importer time to move goods through its operating cycle.

An importer can receive goods, clear customs, place inventory into distribution channels and potentially collect from downstream customers before the time draft matures.

A 90-day or 120-day tenor can therefore function as trade credit embedded in the purchase transaction.

Where a bank accepts the draft, the importer must have an acceptable reimbursement arrangement with that bank. The bank will assess financial strength, facility availability, security, trade history and expected repayment sources before assuming the acceptance obligation.

Why Exporters Accept Time Draft Payment Terms

Exporters can use deferred terms as a commercial tool when customers require working-capital flexibility.

A seller able to offer 60, 90 or 120-day terms can become more competitive against suppliers demanding payment at sight.

Discounting can then allow the exporter to offer those terms while converting the future payment obligation into cash.

The commercial viability depends on whether the discounting cost can be absorbed in the transaction margin and whether the accepted obligation is financeable.

Industries Where Time Drafts Can Appear

Time drafts and related deferred-payment instruments can appear across:

• commodity trading;
• agricultural exports;
• metals and minerals;
• petroleum and refined products;
• industrial equipment;
• machinery;
• chemicals;
• consumer goods;
• automotive components;
• textiles;
• electronics; and
• other recurring cross-border supply arrangements.

What a Financier Reviews Before Discounting an Accepted Draft

The financing package can require:

• copy of the time draft;
• evidence of acceptance;
• face amount and currency;
• acceptance date;
• maturity date;
• identity of the acceptor;
• accepting bank details where applicable;
• underlying sales contract;
• documentary letter of credit where applicable;
• commercial invoice;
• transport documents;
• evidence of complying presentation;
• requested discount amount;
• requested recourse structure;
• exporter KYC; and
• sanctions and transaction information.

Time Draft Risks

The risk profile depends heavily on the structure surrounding the draft.

Relevant risks include:

• Buyer credit risk: a corporate acceptor can fail to pay at maturity.
• Bank credit risk: an accepting or avalising bank can experience financial distress.
• Country risk: capital controls or transfer restrictions can interfere with payment.
• Documentary risk: discrepancies can affect obligations under a documentary letter of credit.
• Fraud risk: drafts, invoices or transport documents can be falsified or duplicated.
• Legal risk: negotiability, endorsement and enforceability depend on applicable law.
• Sanctions risk: parties, banks, vessels, commodities or jurisdictions can create restrictions.
• Recourse risk: the exporter can retain liabilities under the financing agreement.
• Currency risk: settlement currency may differ from the exporter’s operating currency.

Time Drafts Remain Part of a Wider Deferred-Payment Toolkit

Modern trade finance offers several ways to create or finance a future payment obligation.

Time Draft FAQ

What is a time draft?

A time draft is a bill of exchange requiring a specified drawee to pay a stated amount at a future maturity. It is also commonly called a usance draft or time bill.

Is a time draft the same as a banker’s acceptance?

A banker’s acceptance is a specific form of accepted time draft. The time draft becomes a banker’s acceptance when it is drawn on a bank and that bank accepts the obligation to pay it at maturity.

What happens when the buyer accepts a time draft?

A time draft accepted by the commercial buyer becomes a trade acceptance. The buyer is then obligated under the accepted instrument to make payment according to its terms at maturity.

What is the difference between a sight draft and a time draft?

A sight draft requires payment upon presentation. A time draft establishes payment at a future maturity, such as 60, 90, 120 or 180 days later.

Can a time draft be used under a letter of credit?

Yes. Documentary letters of credit available by acceptance can require the beneficiary to present a time draft drawn on the designated bank. Following a complying presentation and acceptance, the bank pays the accepted draft at maturity.

Does every usance letter of credit require a time draft?

A usance structure can operate by acceptance or deferred payment. Acceptance uses a time draft. Deferred payment creates a bank undertaking payable at a future maturity without requiring an accepted draft.

What does documents against acceptance mean?

Documents against acceptance is a documentary collection structure in which the importer receives the shipping documents after accepting a time draft. The importer then pays the accepted amount at the specified future maturity.

Can an accepted time draft be discounted?

Yes, subject to financier approval. Pricing depends on the acceptor, bank support, maturity, jurisdiction, currency, documentation, recourse and market appetite.

Is an avalised time draft a banker’s acceptance?

The structures allocate obligations differently. In a banker’s acceptance, the bank accepts the draft itself. In an aval structure, another party generally accepts or issues the bill and the bank adds its aval or payment guarantee.

Who pays a banker’s acceptance at maturity?

The accepting bank has the payment obligation under the banker’s acceptance. The bank separately relies on its reimbursement arrangement with the importer or account party.