Definition
A bank draft, also known as a banker’s draft, is a type of cheque where the payment is guaranteed by the issuing bank instead of a personal account. It’s typically used when a large-sum payment needs undeniable security. Conversely, a certified cheque is a personal cheque signed by the account holder and guaranteed by the bank to have sufficient funds existing in the account.
Key Takeaways
- A bank draft and a certified cheque are both secure forms of payment but they are not the same. A bank draft is issued by a bank on its own account to make a payment on behalf of a customer, whilst a certified cheque is simply a personal cheque that has been certified by a bank.
- In terms of risk, a bank draft is generally safer. This is because the funds are withdrawn from the customer’s account immediately when the bank draft is issued. On the contrary, a certified cheque carries a risk of bouncing if the account holder’s balance drops before the cheque clears.
- The processing time may vary. A certified cheque may typically clear faster than a bank draft, as the latter could entail more procedures with handling and verification by the bank.
Importance
Bank Draft and Certified Cheque are important finance terms that refer to two different instruments used in secure financial transactions, often chosen for their reliability and credibility. A Bank Draft is a payment made on behalf of a payer, which is guaranteed by the issuing bank.
Since banks stand behind them, it is impossible to cancel or stop payment on them, creating a sense of security for the payee. A Certified Cheque, on the other hand, is a chequing instrument drawn against funds already deposited in an account, where the bank verifies that sufficient funds exist and the signature is genuine.
In essence, the bank certifies the cheque, hence its name. Both payment methods are crucial in various business transactions and investments, providing confidence and reducing the risks associated with bouncing cheques or insufficient funds.
Explanation
A bank draft and a certified cheque are two essential tools used in the financial sector for secured payment options. They serve the purpose of ensuring the recipient that they will receive the payment without a hitch. A bank draft is a type of payment issued by a bank on behalf of the payer, which guarantees that the necessary funds are available.
This type of payment is often used for transactions that require significant amounts of money, since the funds must be available in the payer’s account before the bank will issue the draft. It’s commonly used in international trade, property purchase or when businesses and individuals want to make certain the funds are guaranteed before completing a transaction. On the other hand, a certified cheque is a type of cheque for which the bank verifies that there are enough funds in the cheque issuer’s account to cover the amount specified on the cheque.
Once certified, the cheque amount is frozen and set aside by the bank, ensuring the recipient or payee’s funds are guaranteed upon deposit. This mode of payment is often used when, for instance, making a down payment for a home, car, or other significant assets where the recipient needs assurance that the cheque won’t bounce. Both instruments act as a form of secured payments providing assurance to the receiving party that the funds are available and will be paid.
Examples of Bank Draft vs Certified Cheque
Real Estate Transactions:In case of a real estate purchase or rental agreement, a buyer might prefer to make payments using a bank draft. As bank drafts are prepared by the bank itself, the seller can trust that the funds are secure and guaranteed by the bank. Whereas, a certified cheque, while also guaranteed, can potentially be misappropriated if it’s not handled correctly – banks draft cannot be “stopped” once it is issued, unlike a certified cheque.
Large Purchases:Let’s assume that someone has decided to buy an expensive car. The car dealer may not accept their personal cheque due to the risk of insufficient funds. In such a case, the buyer can either choose a certified cheque or a bank draft. If the buyer opts for a bank draft, the funds are withdrawn from their account and held by the bank until the draft is cashed. In contrast, a certified cheque simply ensures that the buyer has sufficient funds in their account. Both can provide guaranteed payment, but the dealer might prefer a bank draft since the payment would be immediate.
Business Transactions:A company engaged in a significant trade of goods or services could opt for a bank draft or a certified cheque. For example, if a business is making a large purchase of supplies, the supplier might want a bank draft since the payment is immediate with a bank draft. On the other hand, if the trade does not rely on immediacy, a certified cheque can be satisfactory because it also guarantees payment but allows for “stop payment” if a problem arises. In all these scenarios, bank drafts and certified cheques are comparable in terms of being secure forms of payment. However, the immediacy of payment and ability to halt payment can be considerations in choosing between the two.
FAQs: Bank Draft vs Certified Cheque
What is a Bank Draft?
A bank draft is a payment method that involves a third party, specifically a bank or other financial institution. It is a type of check where payment is guaranteed by the issuing bank. Bank drafts are frequently used when dealing with large transactions.
What is a Certified Cheque?
A certified check is a type of check for which the bank verifies that there is a sufficient amount in the account to cover the check and so certifies. The bank then refrigerates the total amount until the check is used. Certified checks are secure payment options, but they don’t come free of charge.
What are the differences between a Bank Draft and a Certified Cheque?
While both these payment methods offer a guarantee of payment, the bank draft is more secure as it removes funds from your account at the time of creation. On the contrary, a certified cheque secures funds in your account until the cheque is cashed.
Is a Bank Draft safer than a Certified Cheque?
Considering safety measures, a bank draft is typically safer than a certified check. This is due to the fact that bank drafts remove funds directly from your bank account and are created by the bank itself, making it harder for the document to be forged.
Can a Bank Draft or Certified Cheque bounce?
A certified cheque and a bank draft are guaranteed payments and they cannot bounce as regular cheques might. Nonetheless, these instruments can still be fraudulent, so one should still verify their authenticity.
Related Entrepreneurship Terms
- Payment Guarantee
- Banker’s Draft
- Cashier’s Check
- Funds Verification
- Drawer and Drawee
Sources for More Information
- Investopedia: This site offers a wealth of articles and resources related to financial topics, including the differences between bank drafts and certified checks.
- The Balance: This finance website offers educational articles about all facets of personal and business finances. They have pieces on both bank drafts and certified checks.
- NerdWallet: This site offers comprehensive and user-friendly guides on a wide range of financial topics. They likely have information on bank drafts and certified checks.
- Bankrate: This is another site with authoritative resources about banking and finance.
