Bills of Exchange (Drafts)
The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time.
The draft is widely used in international trade, most frequently in the payment against a letter of credit (L/C). It is also used in the open account without any L/C involved.
In the L/C sample, the draft is drawn on the confirming bank, which is The Moon Bank. The UVW Exports may issue a draft drawn on The Moon Bank as follows:
Sample Instrument: Draft
The "No." (number) in the above sample draft may be used for the exporter's reference number. Blank drafts are available at the paying bank.
First of Exchange (Second Unpaid)
and Second of Exchange (First Unpaid)
In practice, it is not uncommon that two drafts are drawn on the drawee bank in a letter of credit (L/C) to ensure that at least one draft reaches the drawee when they are dispatched separately. The issuance of more than one draft in a letter of credit follows the same logic as in the issuance of bill of lading in more than one original. At times even three drafts may be drawn on the drawee bank, this practice was not uncommon before in certain countries.
In contrast, normally one draft (sola bill) is issued in a documentary collection where the draft is drawn on the importer.
The sample draft shown above is the first draft, marked "First of Exchange (Second Unpaid)" and the number "1". In the second draft, if any is issued, is marked "Second of Exchange (First Unpaid)" and the number "2". Some drafts may not be numbered "1" or "2".