Table of Contents Hide
- What is a Bill of Exchange?
- How Bills of Exchange Works
- What Kinds of Bills of Exchange Are There?
- Bill of Exchange Risks
- What Is the Distinction Between a Bill of Exchange and a Check?
- What is an International Bill of Exchange?
- Bills of Exchange FAQs
- What are kinds of bills of exchange?
- Is a cheque a bill of exchange?
- What is discounting of bills of exchange?
Payments are essential in any business. However, as anyone who has chased an invoice knows, getting paid isn’t always straightforward. A bill of exchange is intended to hold everyone accountable for making timely payments. With our useful guide, you can learn everything you need to know about discounted bills of exchange, including the Bill of Exchange Act 1909.
What is a Bill of Exchange?
Bills of exchange are legally enforceable agreements between two parties to pay a defined sum of cash to the other party on a specified date or on-demand. Bills of exchange are mostly utilized in international commerce. As other modes of payment have become more prevalent, their use has waned.
How Bills of Exchange Works
A bill of exchange transaction might have up to three parties involved. The drawee is the person or entity who pays the amount mentioned in the bill of exchange. The payee is the person who gets the money. The drawer is the person or entity who obligates the drawee to pay the payee. Unless the drawer transfers the bill of exchange to a third-party payee, the drawer and the payee are the same entity.
A bill of exchange, unlike a cheque, is a written document that details a debtor’s debt to a creditor. It is widely used to pay for goods or services in international trade. While a bill of exchange is not a contract in and of itself, the parties involved can utilize it to carry out the provisions of a contract. It might specify whether payment is required immediately or at a later date. Credit duration, such as 90 days, is frequently extended. A bill of exchange must also be accepted by the drawee in order to be valid.
Bills of exchange do not typically pay interest, making them essentially post-dated cheques. They may, however, accumulate interest if not paid by a defined date, in which case the rate must be indicated on the instrument. They can, on the other hand, be transferred at a discount before the payment deadline. The amount of money, the date, and the persons involved, including the drawer and drawee, must all be clearly stated in a bill of exchange.
A bank draft is a bill of exchange that has been issued by a bank. The transaction is guaranteed by the issuing bank. Individuals can issue bills of exchange, which are known as trade drafts. A sight draft is a bill of exchange that is used when funds must be paid promptly or on-demand. A sight draft in international trade lets an exporter retain title to the exported goods until the importer receives possession and instantly pays for them. However, if the money is to be paid at a future date, it is referred to as a time draft. A time draft offers the importer a brief period of time after receiving the goods to pay the exporter.
Bill of Exchange Parties
A bill of exchange transaction can involve three different parties. These are their names:
- A bill of exchange is created by the drawer.
- Drawer signs the bill.
- A bill of exchange can be drawn by a creditor who is entitled to payment from the debtor.
- The individual on whom the bill of exchange is drawn is known as the drawee.
- The debtor is the person who must pay the money to the drawer.
- He is also referred to as ‘Acceptor.’
- The payee is the person or entity to whom payment must be made.
- The drawer or a third party may be the payee.
Information Included in Bills of Exchange
Normally, a bill of exchange comprises the following information:
- Title: The term “bill of exchange” is printed on the front of the document.
- Amount. The sum to be paid both numerically and textually conveyed.
- As of: The day on which the money is due. Can be stated as a specific number of days following an occurrence, such as shipment or delivery receipt.
- Payee: Indicates the name (and potentially the address) of the recipient.
- Unique ID: The bill should have a unique identification number.
- Signature. The bill is signed by someone authorized to bind the drawee to pay the specified amount of money.
Because the bill of exchange issuers use their own formats, there may be some variance in the information previously mentioned, as well as in the style of the document.
What Kinds of Bills of Exchange Are There?
A bank draft is a bill of exchange that is issued by a bank. The transaction is guaranteed by the issuing bank. A trade draft is a bill of exchange issued by an individual. A sight draft is a bill of exchange that is used when funds must be paid promptly or on-demand. A sight draft in international trade lets an exporter retain title to the exported goods until the importer receives possession and instantly pays for them. If the funds are to be paid at a future date, it is known as a time draft, which enables the importer a brief period of time after receiving the products to pay the exporter.
Bills of Exchange Transferability
Because a bill of exchange is transferable, the drawee may find itself paying a party other than the one to whom it originally agreed to pay. By endorsing the reverse of the paper, the payee can transfer the bill to another party.
Discounted Bills of Exchange
A payee may sell bills of exchange for another party for a discounted price in order to get funds before the bill’s payment date. The discount represents the interest expense of paying off the loan early.
What is a Promissory Note?
The promissory note is described as a written instrument (not a banknote or currency note) carrying an unconditional pledge signed by the maker to pay a given sum of money only to or on behalf of a certain person or to the bearer of the instrument.
The Value of a Promissory Note in a Bill of Exchange
The Negotiable Instruments Act of 1881 defines a promissory note as “an instrument in writing (not being a banknote or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.” A promissory note payable to the bearer, on the other hand, is prohibited by the Reserve Bank of India Act. As a result, a promissory note cannot be payable to the bearer.’
Promissory Note Parties
A Promissory Note Has Two Signatories:
- Maker: A maker or drawer is an individual or entity who creates or draws the promissory note with the commitment to pay a defined sum. Maker is sometimes referred to as promisor.
- Payee: The individual in whose favor the promissory note is drawn is referred to as the payee.
What Is the Distinction Between a Bill of Exchange and a Promissory Note?
A promissory note differs from a bill of exchange in that the latter is transferable and can bind one party to pay a third party who was not involved in its formation. Banknotes are the most frequent type of promissory note. A bill of exchange is issued by a creditor and directs a debtor to pay a specific amount within a specified time frame. The promissory note, on the other hand, is issued by the debtor and represents a commitment to pay a specific sum of money within a specified time frame.
When Interest Is Paid on a Bill of Exchange
A bill of exchange normally does not include a requirement to pay interest. If interest is to be paid, the document specifies the percentage interest rate. A bill that does not pay interest is effectively a post-dated check.
Bill of Exchange Risks
When an entity accepts a bill of exchange, it assumes the risk that the drawee will not pay. This is especially important if the drawee is a person or a non-bank business. Regardless of who the drawee is, the payee should examine the issuer’s creditworthiness before receiving the bill. If the drawee fails to pay the bill on the due date, it is said to be dishonored.
What Is the Distinction Between a Bill of Exchange and a Check?
A check is always associated with a bank, whereas a bill of exchange can be associated with anyone, including a bank. Checks are payable on demand, however, a bill of exchange might specify whether payment is required immediately or at a later date. Bills of exchange do not typically pay interest, making them essentially post-dated cheques. If they are not paid by a set date, they may accrue interest, but the rate must be indicated on the instrument. A bill of exchange, unlike a cheque, is a written document that details a debtor’s debt to a creditor.
Is a Bill of Exchange a Legally Binding Document?
The Bill of Exchange Act 1909 governs the rules governing bills of exchange in Australia. So, how does the bill address the legality of these documents? A bill of exchange, according to the Bills of Exchange Act of 1909, is an unconditional order for one party to pay another. While not exactly the same as a contract, they are similar sorts of documents, and a bill of exchange can also be used to assure payment as part of a contract. Furthermore, the bill holder has the right to sue for any payments that are not made.
What is an International Bill of Exchange?
To ease the process, a bill of exchange can be utilized when Company A seeks payment from Company B and Company B allocates the payment to Company C. When it comes to foreign bills of exchange, the method is the same, but on a larger scale.
Consider the following example: Company A sells books purchased from Company B, which then places orders with Company C. Company B places an order with Company C and then issues a bill of exchange requiring Company A to pay Company C upon receipt of the order.
Company B repays Company C with money owed to Company A. Although this may appear to be bothersome, the fundamental advantage of bills of exchange is that they do not have to be paid immediately. It has grown less widespread in recent years, with other delayed payment options, such as credit cards, becoming significantly more popular.
Bills of Exchange FAQs
What are kinds of bills of exchange?
Bills of exchange are classified into two sorts in terms of accounting:
Trade bill: A trading bill is a bill of exchange that is drawn and accepted to complete a trade transaction.
Accommodation bill: A bill of exchange drawn and accepted for mutual assistance is known as an accommodation bill.
Is a cheque a bill of exchange?
A cheque is a form of a bill of exchange that is used to make payments to anyone. It is an unconditional command addressing the drawee to pay a specified sum of money to the payee on behalf of the drawer.
What is discounting of bills of exchange?
Bill discounting refers to the encashment of a bill before its maturity date. The bank subtracts its fees from the bill. The bill will be paid by the bank after some interest has been deducted (called a discount in this case). Discounting the bill refers to the procedure of encashing the bill with the bank.