Definition of bill of exchange

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What is a bill of exchange?

A bill of exchange is a written order used primarily in international trade that obliges one party to pay a fixed sum of money to another party on demand or on a pre-determined date. Bills of exchange are similar to checks and promissory notes— they can be drawn by private individuals or banks and are generally transferable by endorsements.

Key points to remember

  • A bill of exchange is a written order committing one party to pay a fixed sum of money to another party on demand or at some time in the future.
  • A bill of exchange often consists of three parties: the drawee is the party who pays the sum, the beneficiary receives this sum and the drawer is the one who obliges the drawee to pay the beneficiary.
  • A bill of exchange is used in international trade to help importers and exporters complete transactions.
  • Although a bill of exchange is not a contract in itself, the parties involved can use it to specify the terms of a transaction, such as credit terms and accrued interest rate.

Understanding bills of exchange

A bill of exchange transaction can involve up to three parties. the drawn is the party who pays the sum indicated by the bill of exchange. the beneficiary is the one who receives this sum. The drawer is the party that obliges the drawee to pay the beneficiary. The drawer and the payee are the same entity unless the drawer transfers the bill of exchange to a third party beneficiary.

Unlike a check, however, a bill of exchange is a written document outlining a debtor’s debt to a creditor. It is frequently used in international trade to pay for goods or services. Although a bill of exchange is not a contract in itself, the parties involved can use it to fulfill the terms of a contract. It may specify that payment is due on demand or at a specified future date. It is often extended with credit terms, such as 90 days. In addition, a bill of exchange must be accepted by the drawee to be valid.

Bills of exchange generally do not pay interestessentially making them postdated checks. However, they may accrue interest if not paid by a certain date, in which case the rate must be specified on the instrument. Conversely, they can be transferred with a discount before the date indicated for payment. A bill of exchange should clearly detail the amount of money, the date and the parties involved, including the drawer and the drawee.

If a bill of exchange is issued by a bank, it can be called a bank draft. The issuing bank guarantees payment for the transaction. If bills of exchange are issued by private individuals, they can be qualified as commercial drafts. If funds are to be paid immediately or at sight, the bill of exchange is known as sight effect. In international trade, a sight draft allows an exporter to hold title to exported goods until the importer takes delivery and pays for them immediately. However, if funds are to be disbursed at a specified future date, this is a draft time. A term draft gives the importer a short period of time to pay the exporter for the goods after receiving them.

Bills of exchange are useful in international trade as they help buyers and sellers deal with the risks associated with change rate fluctuations and differences in jurisdictions.

The difference between a promissory note and bill of exchange is that the latter is transferable and may oblige a party to pay a third party who did not participate in its creation. Tickets are common forms of promissory notes. A bill of exchange is issued by the creditor and orders the debtor to pay a certain amount within a given time. The promissory note, on the other hand, is issued by the debtor and is a promise to pay a certain amount of money within a given period.

Example of bill of exchange

Say Company ABC buys auto parts from Car Supply XYZ for $25,000. Car Supply XYZ draws a bill of exchange, becoming the drawer and payee in this case. The bill of exchange states that Company ABC will pay Car Supply XYZ $25,000 in 90 days. Company ABC becomes the drawee and accepts the bill of exchange and the goods are shipped. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for payment. The bill of exchange was an acknowledgment created by Car Supply XYZ, which was also the creditor in this case, show the indebtedness of company ABC, the debtor.

What are the differences between a bill of exchange and a check?

A check always involves a bank while a bill of exchange can involve anyone including a bank. Checks are payable on sight while a bill of exchange may specify that payment is due on sight or at a specified future date. Bills of exchange generally do not earn interest, which essentially makes them post-dated checks. They can generate interest if they are not paid by a certain date, but this rate must be specified on the instrument. Unlike a check, a bill of exchange is a written document describing a debtor’s debt to a creditor.

Who are the parties to a bill of exchange?

A bill of exchange transaction can involve up to three parties. The drawee is the one who pays the amount indicated by the bill of exchange. The beneficiary is the one who receives this sum. The drawer is the party that obliges the drawee to pay the beneficiary. The drawer and the payee are the same entity unless the drawer transfers the bill of exchange to a third party beneficiary.

What are the different types of bills of exchange?

A bill of exchange issued by a bank is called a bank draft. The issuing bank guarantees payment for the transaction. A bill of exchange issued by individuals is called a draft. If funds are to be paid immediately or at sight, the bill of exchange is known as a sight draft. In international trade, a sight draft allows an exporter to hold title to exported goods until the importer takes delivery and pays for them immediately. However, if the funds are to be paid at a later date, this is a term draft which gives the importer some time to pay the exporter for the goods after receiving them.

What is the difference between bill of exchange and promissory note?

The difference between a promissory note and a bill of exchange is that the latter is transferable and may require one party to pay a third party who was not involved in its creation. Banknotes are common forms of promissory notes. A bill of exchange is issued by the creditor and orders the debtor to pay a certain amount within a given time. The promissory note, on the other hand, is issued by the debtor and constitutes a promise to pay a certain amount of money within a given period.

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