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Time drafts are financial drafts that carry a payment date that is set for some specified future point in time. Generally, there are specific circumstances or conditions that must be met in order for the time draft to pay out. Often, the draft is put in place with the anticipation that certain events will occur between the date that the draft is created and the date that the draft is set for execution.
The time draft is different from the common sight draft. With a sight draft, the transaction can take place at any time. All that is required is that the issuer of the draft initiate the transaction. As long as the draft meets the general terms and conditions that apply to any type of transaction conducted by a bank or financial institution, the sight draft will be honored and processed upon presentation.
By contrast, this kind of draft cannot be executed prior to the date specified in the terms of the draft agreement. Furthermore, any provisions included in the text of the draft must be complied with in full before the issuing financial institution will execute a time draft. For example, if the anticipation is that a Letter of Credit will be approved prior to the execution date named in the draft, the approval must take place and be confirmed before the time draft will be honored.
The time draft is sometimes utilized as a means of making advance preparations to render compensation to a third party is payable in the future. In situations where the payment is conditional on the completion of specified tasks or projects contracted by the third party, the issuing institution usually requires some sort of proof that the project or task has in fact been completed before the draft is honored and processed. Thus, the draft is sometimes a helpful tool in keeping projects on target for completion, as the recipient of the draft has a vested interest in completing the work on schedule and receiving compensation in a timely manner.