A bill of exchange is a financial instrument used in international trade and commerce. Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by an endorsement.
- Definition: A bill of exchange is a written order or promise from one party (the drawer) to another party (the drawee) to pay a specified amount of money to a third party (the payee), either immediately or at a future date.
- Parties Involved:
- Drawer: The person or entity who creates the bill and orders payment.
- Drawee: The person or entity on whom the bill is drawn (usually the debtor).
- Payee: The person or entity who receives the payment.
- Components:
- Amount: The specified sum of money.
- Date: The due date for payment.
- Place: The location where the bill is payable.
- Signature: The drawer’s signature.
- Types:
- Sight Bill: Payable immediately upon presentation.
- Term Bill: Payable after a specified period (e.g., 30 days after sight).
- Clean Bill: No supporting documents required.
- Documentary Bill: Supported by shipping documents (e.g., invoices, bills of lading).
- Functions:
- Credit Instrument: Used to extend credit between parties.
- Payment Mechanism: Facilitates payment for goods or services.
- Negotiable: Can be transferred or endorsed to another party.
the key differences between a bill of exchange and a promissory note:
- Bill of Exchange:
- Definition: A bill of exchange is a negotiable instrument issued by the creditor (drawer) to order the debtor (drawee) to pay a specific sum of money within a predetermined time frame or upon demand.
- Parties Involved:
- Drawer: The creditor who issues the bill.
- Drawee: The debtor who needs to pay the amount.
- Payee: The recipient of the payment.
- Acceptance: The drawee must accept the bill before payment.
- Liability: The drawer’s liability is secondary and conditional.
- Purpose: Used in business transactions to settle outstanding debts.
- Promissory Note:
- Definition: A promissory note is a negotiable instrument containing a written promise by the debtor (maker) to pay a specific amount to the creditor (payee) either on a pre-specified date or upon demand.
- Parties Involved:
- Maker/Drawer: The debtor who promises to pay.
- Payee: The creditor who receives the promise.
- Acceptance: No acceptance required; the note is valid once drawn.
- Liability: The maker’s liability is direct and absolute.
- Purpose: Used for loans, credit arrangements, or personal transactions.