A Draft at Sight is a bill of exchange (draft) drawn by the seller on the buyer requiring payment immediately on presentation. The seller presents the draft together with the shipping documents (bill of lading, commercial invoice, packing list, COA, SDS, Certificate of Origin) to the buyer’s bank. The buyer’s bank releases the documents to the buyer only on payment of the draft. The buyer cannot take delivery of the cargo without first paying, the bill of lading is the document of title, and without it the carrier will not release the cargo. The structure is the standard mechanism under Documents against Payment (D/P) documentary collection arrangements.
How draft at sight works
Six-step flow:
- Seller ships the goods, obtains the bill of lading and other shipping documents
- Seller draws a sight draft on the buyer for the contract value
- Seller presents the draft and the shipping documents to its bank (the remitting bank)
- Remitting bank forwards the package to the buyer’s bank (the collecting bank)
- Collecting bank notifies the buyer that documents are available against payment
- Buyer pays the draft, the collecting bank releases the documents, the buyer takes delivery
The buyer cannot take delivery before paying, the cargo is “locked” until payment.
Sight draft vs LC at sight
The two structures both require payment at the moment of document presentation. They differ in who guarantees the payment:
| Aspect | Sight draft (D/P) | LC at sight |
|---|---|---|
| Payment guarantee | None, relies on the buyer paying | Yes, the issuing bank guarantees payment |
| Bank fees | Low, just transmission and document handling | Higher, issuance fee, document examination, often confirmation |
| Seller risk if buyer refuses payment | Seller controls the cargo (documents not released) but must arrange disposal or re-export | Bank pays seller; bank pursues buyer |
| Speed | Faster (days from presentation to payment) | Similar speed but with bank examination layer |
For an established Chinese supplier shipping to a known and creditworthy foreign buyer, sight draft is often the preferred mode, lower bank fees than LC, faster cycle, and the cargo control mitigates the credit risk to manageable levels. For a new buyer-supplier relationship or a less-creditworthy buyer, LC at sight offers stronger protection at higher fees.
When sight draft is the right choice
Sight draft works well when:
- The buyer-seller relationship has track record. Both sides have shipped multiple times under similar terms with consistent payment.
- The cargo retains value if disposal becomes necessary. Commodity chemicals can be re-sold; specialty or buyer-specific products cannot.
- The destination port allows efficient cargo retention pending payment. Some destinations have limited free time or impose charges that make extended payment delays expensive.
- The buyer’s bank has a working relationship with the seller’s bank. Documents flow more reliably between known correspondent banks.
When sight draft is the wrong choice
Sight draft is wrong for:
- First-time buyer-seller relationships. The seller has no track record on which to base the credit decision. LC at sight is more appropriate.
- Specialty or buyer-specific cargo. If payment is refused, the seller cannot easily resell.
- Cargo with rapid demurrage clocks at destination. Refusal disputes can run weeks; demurrage accrues on the seller’s account.
- Buyers in high-political-risk countries. Sovereign-level disruption can prevent payment even with willing buyer.
The “non-payment” failure mode
The structural risk in sight draft is buyer refusal to pay. This can happen for legitimate reasons (cargo failed inspection, market price moved against the buyer, dispute over contract terms) or for opportunistic reasons (the buyer simply tries to renegotiate downward at the moment of payment, knowing the seller faces disposal cost on refusal).
When refusal happens:
- The seller’s bank notifies the seller
- The seller either renegotiates with the buyer to capture some value, arranges re-export to another buyer, or disposes of the cargo at salvage value
- Demurrage at destination accrues to the seller during the dispute
- Direct cost of cargo retention plus shipping back or to alternate destination is significant
For chemical cargo specifically, the seller’s downside in a refusal can run 30-60% of the cargo value. Commodity chemicals retain better recovery value; specialty chemicals can be effectively unrecoverable.
Sight draft in Chinese chemical trade
For Chinese export to established Western buyers, sight draft is one of three common payment modes alongside T/T at sight and LC at sight. The mode choice depends on relationship maturity:
- First 1-3 shipments: T/T with partial advance, OR LC at sight
- Established relationships (10+ shipments without disputes): T/T at sight, OR sight draft, OR open account
- Long-term supply contracts: any of the above; sight draft becomes attractive at higher volumes due to fee savings
Chinese suppliers familiar with sight draft typically prefer it over LC at sight when the buyer is creditworthy, the savings on bank fees offset the residual credit risk.
Operator note: the Chinese-bank-side delay
Chinese banks processing inbound sight drafts on Chinese-based buyers can be slower than Western banks. Document arrival to buyer notification can take 5-10 business days for routine flows; longer if any document discrepancy arises. For Chinese buyers paying foreign suppliers via sight draft, this lag is the routine variable. For Chinese suppliers receiving payment via sight draft on Western buyers, the foreign banking system is typically faster.
Related terms
LC is the parallel payment instrument with bank-side guarantee. T/T is the wire-transfer alternative. Documentary collection is the umbrella term covering sight draft and time draft variants. Usance LC is the LC variant for delayed payment. Bank acceptance bill is the Chinese-domestic alternative.