Skip to content
Related Articles
Open in App
Not now

Related Articles

Bills of Exchange

Improve Article
Save Article
  • Last Updated : 03 Nov, 2022
Improve Article
Save Article

A bill of exchange is a sort of written order or notification used in trading that obligates one party to make a certain payment to another party either immediately on demand or at a predetermined duration of time. A bill of exchange is used also in international trading to facilitate transactions between importers and exporters. 

A bill of exchange is not a contract, the parties involved can use it to establish the terms and circumstances of a transaction, such as the terms of credit and the rate of interest that will accrue.
The primary aim and objectives of the bill of exchange are to allow the financier to have legal authority over both buyer and seller, provide the seller with finance by transferring their debts to a bank, and grant the credit for trade lawfully by making payments on prospective agreed dates. Typically employed in international trade, a bill of exchange commits one party to pay a specific sum of money to another party at a specified future time. According to Investopedia, bills of exchange are similar to checks and promissory notes.

Parties of a Bill of Exchange

A Bills of Exchange involves three parties: 

  1. Drawee: This type of party pays the specific amount that is mentioned on the bill of exchange to the payee. 
  2. Drawer: This party is kind of a mediator between the drawee and the payee. This type of party collects the mentioned amount directly from the drawee, or this party can directly demand payment from the drawee. 
  3. Payee: This type of party collects the mentioned specific amount on the bill of exchange from the drawee.

What are the features of the Bill of Exchange?

  • Bill should be in written form.
  • Bill should be stamped and dated.
  • Bill should have the signature of the maker or drawer.
  • The drawer’s name needs to be mentioned.
  • There should be a fixed date on which the drawee has to pay its amount.
  • The amount should be definite on a bill of exchange.
  • It must include a request for payment in cash, not in kind.
  • The mentioned amount on a bill of exchange should be paid on-demand or for a fixed duration of time.

Types of Bills of Exchange

There are 9 types of bills of exchange that are mentioned below with their details:

  1. Documentary Bill: The pertinent documents that attest to the legitimacy of the sale or other transactions between the seller and the buyer are annexed to this kind of bill of exchange.
  2. Demand Bill: This invoice must be paid in full right away. The bill must be paid whenever it is presented because there is no set due date for it.
  3. Usage Bills: These bills are time bounded in which the payments must be paid within the given duration of time. 
  4. Inland bill: They can only be paid in the country in which it is issued; they cannot be paid abroad. The foreign bill is the opposite of this one.
  5. Clean Bill: Because this bill lacks any supporting documentation, its interest rate is higher than that of the other bills.
  6. Foreign Bill: A bill that is paid outside of India. The most common examples are an export bill and an import bill.
  7. Accommodation bill: It has been sponsored, created, and accepted without any restrictions.
  8. Trade Bills: These bills are specifically and exclusively concerned with trade.
  9. Supply Bill: This bill is taken by contractors and suppliers from government agencies.

Advantages of Bill of Exchange

  • The bills of exchange give the debtors a full period of credit. Debtors cannot be compelled to make a payment before the deadline.
  • Credit sales and credit purchases are made possible by the bills of exchange.
  • The bill of exchange specifies the payment date, giving the creditor advance notice of when to anticipate payment (cash). Additionally, the debtor is aware of the deadline for making the payment or settlement.
  • The bill of exchange provides a simple method for transferring money from one location to another.
  • The bills of exchange are negotiable documents, number 5. Therefore, a bill of exchange may be transferred from one party to another in a debt settlement.

Importance of Bill of Exchange

  1. The constant change in the rate of exchange can negatively affect long-term trading associations. In such a situation a fixed term of payment laid by Bills of Exchange can give assurance.
  2. Legal Action serves as an important base for taking legal action in case a buyer fails to make payment on the due date.
  3. A Bill of Exchange can only be signed if the terms and conditions are read and accepted.
  4. Bill of Exchange is easily transferable including the endorsement and liabilities related to it.

What is a Promissory Note?

A written document (not a banknote or currency note) that carries a maker’s unequivocal promise to pay a certain sum of money only to, or at the direction of, a particular person, or to the document’s bearer, is referred to as a promissory note.

A promissory note, described as “an instrument in writing (not being a banknote or a currency note), signed by the maker,” contains an unqualified promise to pay a certain sum of money only to or at the direction of a particular person, or the instrument’s bearer. The Reserve Bank of India Act forbids the issuance of promissory notes payable to the bearer. As a result, the bearer of a promissory note cannot be its beneficiary.

FAQs on Bill of Exchange

Question 1: Define the bill of exchange and mention the name of parties that are included in the transaction of the bill of exchange.

Answer:

A bill of exchange is a sort of written order or notification used in trading that obligates one party to make a certain payment to another party either immediately on demand or at a predetermined duration of time. 

A Bills of Exchange transaction may involve three parties: the Drawee, the Drawer, and the Payee.

Question 2: Write two important features of a bill of exchange.

Answer:

Two important features of a bill of exchange:

  1. Bill should be stamped and dated.
  2. Bill should have the signature of the maker or drawer.

Question 3: What is a promissory note?

Answer:

A written document (not a banknote or currency note) that carries a maker’s unequivocal promise to pay a certain sum of money only to, or at the direction of, a particular person, or to the document’s bearer, is referred to as a promissory note.

Question 4: What are inland and clean bills?

Answer:

  1. Inland bill: They can only be paid in the country in which it is issued; they cannot be paid abroad. The foreign bill is the opposite of this one.
  2. Clean Bill: Because this bill lacks any supporting documentation, its interest rate is higher than that of the other bills.
My Personal Notes arrow_drop_up
Related Articles

Start Your Coding Journey Now!