What can a bill of exchange be used for?
A bill of exchange is used in international trade to help importers and exporters fulfill transactions. While a bill of exchange is not a contract itself, the involved parties can use it to specify the terms of a transaction, such as the credit terms and the rate of accrued interest.
They're transferrable. Bills of exchange are more than promises to pay; they're negotiable financial assets that can be transferred from the drawer or payee to different parties. That means they can be used as an asset to negotiate or satisfy debts. They support discounting.
Why Do They Use Bills of Exchange? Bills of exchange increase the liquidity of international commerce, despite the long delays of international payments. The recipient of a bill of exchange can sell it for cash, rather than wait for full payment.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to be accepted by the drawee (debtor) or someone on his behalf. It is just a draft till its acceptance is made.
Any member bank may accept drafts or bills of exchange drawn upon it having not more than three months' sight to run, exclusive of days of grace, drawn under regulations to be prescribed by the Board of Governors of the Federal Reserve System by banks or bankers in foreign countries or dependencies or insular ...
A bill of exchange must clearly detail the amount of money, the date, and the parties involved, including the drawer and drawee. If a bill of exchange is issued by a bank, it can be referred to as a bank draft. The issuing bank guarantees payment on the transaction.
Bills of exchange have several disadvantages for the supplier. First, the supplier is not paid at the time of delivery or performance: the payment terms can therefore cause cash flow problems if poorly managed. Second, bills of exchange may remain unpaid on the due date.
There is a risk that the bill of exchange will not be accepted. You still have ownership and control of the goods, but in your customer's country. There is still a risk that you will not receive payment after the bill is accepted. But you will have a strong basis for pursuing legal action against the customer.
It is a convenient means of credit. A buyer can buy goods on credit by using a Bills of Exchange and then pay it after the credit period. Sellers can get immediate payment from banks by discounting the Bill or by endorsing it in favor of another party. It is conclusive proof of a credit transaction.
A typical endorsement includes a clause of transfer ("After me to order"), the information about the endorsee, (i.e. the information about the person to whom the bill is transferred) and the signature of the endorser. The endorsement may also have the form of a blanket endorsement.
Which does not apply on bill of exchange?
A bill of exchange has many features such as, it is in writing, the order to make payment is unconditional, must be payable to bearer, has grace period, must be stamped as per the requirement of law, etc. Crossing is not necessary for a bill of exchange.
A promissory note is a written promise, whereas a bill of exchange is a written order. The promissory note allows no copies, whereas a bill of exchange can have multiple copies. Three parties are involved in a bill of exchange, but a promissory note only involves two parties.
When a bill was drawn by the creditor upon his debtor, it has to be accepted by the debtor or someone on his behalf.
A bill of exchange, a short-term negotiable instrument, is a signed, unconditional, written order binding one party to pay a fixed sum of money to another party on demand or at a predetermined date. A bill of exchange is sometimes called draft or draught, but draft usually applies to domestic transactions only.
A bill of exchange requests that the recipient makes payment, regardless of where the funds originated. A cheque clearly states where the money will come from and is far more direct: one person writes the cheque, one person banks it, and the bank fulfils it.
Not all financial institutions exchange currency. Even if your bank provides this service, your nearest branch may only have certain types of currency available or limited amounts.
To invest in an exchange fund, investors may be required to qualify as an accredited investor 1 or qualified purchaser. And depending on the fund, one or more acceptable securities with a combined value ranging from $500,000 to $1 million must be contributed in exchange for fund shares.
91. A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted.
In international trade, the exporter (the drawer) draws a bill of exchange on the importer (called the drawee). The payer may be the exporter itself or a third party. Once the bill of exchange is accepted by the drawee (the importer) the drawee is liable on the bill of exchange as if he had written a cheque.
Hence, all the above statements are true about a bill of exchange, except it is a conditional order to pay.
What is the main advantage of a bill of exchange?
Advantages of Bill of Exchange
Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be easier for the drawer to recover the amount legally.
Issued by banks or individuals, a bill of exchange can be transferred to others through endorsements, offering both flexibility and security in business dealings. Essentially, it streamlines trade by formalising payment obligations, fostering trust, and ensuring reliability between trading partners.
Key Takeaways
Foreign exchange risk can also affect investors who trade in international markets and businesses engaged in the import/export of products or services to multiple countries. Three types of foreign exchange risk are transaction, translation, and economic risk.
Payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment.
In conclusion we can say that a Bill of Exchange is issued by a bank whereas a Promissory Note is issued by an individual/firm. They both have different purposes, uses and functions; they cannot be used in place of one another. Both are quite secure instruments used for their specific purpose.
