Bill of Exchange: Meaning, Features, Uses, Types & More

One of the most known forms of financial instruments is a bill of exchange, which has improved intercountry and intercountry trade and payment. Fundamentally, its main use is in ensuring a payment transaction between two parties is done in a secure and well-organized manner. For these reasons, students of commerce study the concept of a bill of exchange since it is integral to national and international trade finance.

A bill of exchange is, in simple words, a written, unconditional order, signed by one party (the drawer), ordering another party (the drawee) to pay a specified sum of money to a third party (the payee), either immediately or at a fixed future date. Bills are transferable and may be endorsed for others; this becomes even more flexible for business transactions.

What is a bill of exchange?

A bill of exchange is such a document on which there appears a promise to pay a certain sum of money at some future date; besides, it may even be payable at any time upon demand. Its acceptance is covered under the Negotiable Instruments Act, of 1881. A bill of exchange can be used as an instrument of credit; the buyer takes the goods or services and agrees to pay for them at a later date.

Essential Components

It cannot be possible to understand what the bill does in the context of commerce unless one identifies the main players who are involved.

Drawer: The party issuing and drawing up the bill. Generally, he is either a seller or a creditor demanding payment from the debtor. He has a right to assign the bill to any other person by endorsement.

Drawee: The person or party expected to pay the bill once presented is known as the drawee. He or she is often the buyer or debtor. Upon his or her acceptance of the bill, he or she becomes liable for the payment. The party is required to pay the bill.

Payee: The payee is the recipient of the payment. It can be the same person as the drawer in some instances, but the payee may be a third party if the drawer has transferred or endorsed the bill.

Characteristics of a Bill of Exchange

A bill of exchange boasts several distinct characteristics that render it a secure financial tool.

• Written Instrument: It must be in writing and signed by the drawer, which makes it legal.
• Unconditional Order: The payment order for the bill of exchange is unconditional in that it does not attach any condition to the process of payment.
• Specified Amount: The amount to be paid should be indicated in figures as well as in words to avoid any ambiguity regarding the amount to be transferred.
• Specific Time of Payment: A bill can be either a bill for present payment or a specific date for payment.
• Payable to a Certain Person: The bill of exchange needs to be payable to a specific person, the payee, to whom the payment should be made on behalf of the drawer.
• Signed by the Drawer: This bill is only valid when it has the signature of the drawer, in which case he accepts the liability of drawing his order of payment.

Uses of a Bill of Exchange

A bill of exchange is applied in numerous ways in business and finance.

• Facilitating Trade: It facilitates commerce by providing the seller with a secure mechanism for getting paid later while the buyer gets his goods immediately.
• Instrument of Credit: Credit is extended to the buyer for a bill of exchange not only in the sense that it allows time for payment to occur but also not forgetting that simultaneously it upholds the right of the seller to payment.
• Negotiable Instrument: The fact that a bill can be transferred and endorsed to third parties means that it is also a negotiable instrument, thus affording liquidity and flexibility.
• Evidence of Title: A bill of exchange offers written proof of debt that can be pressed in courts if a payment defaults.

Types of the Bill of Exchange

The nature and terms of payment influence the various kinds of bills of exchange.

1. Inland Bill

This is a bill that is drawn and payable within a country. For example, a bill drafted in India and payable within India. 

2. Foreign Bill

A bill drawn in one country and payable in another is called a foreign bill. An example of a foreign bill would be a bill drawn in the USA that is payable in the UK.

3. Time Bill

A time bill is said to be payable after some period or on a fixed future date.

4. Demand Bill

A bill of sight is also referred to as a demand bill, which is payable instantly when it is presented to the drawee.

5. Trade Bill

Applied in day-to-day businesses where the drawer sells his goods or services to the drawee and presents the latter with a bill demanding payment.

6. Accommodation Bill

One which is drawn without prior trade transaction; it is made out of favour as it is done to assist another party to secure their funds, but it remains legally enforceable.

Conclusion

A bill of exchange serves the crucial needs of modern trade while maintaining security and reliability in all transactions across the world. With clear legal recognition and easy transferability, businesses can manage credit, ensure payments, and keep a healthy cash flow due to using bills of exchange. Commerce students and professionals can walk through the intricate part of trade finance by knowing parties involved, features, and types of the bill of exchange. Whichever way-trade is domestic or international, educating oneself on the bill of exchange opens doors to this highly trusted financial instrument.

Bill of Exchange FAQs

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

The main difference between a bill of exchange and a promissory note is that the former is an order to pay a particular amount, whereas the latter is the promise that one party will pay a particular sum. In the case of a bill of exchange, three parties are incorporated—that is, drawer, drawee, and payee—but in the case of a promissory note, two parties are included, namely maker and payee.

2. Is a bill of exchange discountable?

Yes, a bill of exchange can be discounted as it can be sold to a bank or other financial institutions before the date of maturity for less than its face value.

 3. What is the effect if a bill of exchange is dishonored?

 If the drawee refuses to pay for the presentation, it is dishonored. Subsequently, a drawer may institute legal proceedings or raise an action against the bill.

4. A bill of exchange differs from a cheque in the following.

A cheque is always drawn on a bank and payable on demand, whereas a bill of exchange can be drawn upon any party and may be payable on a future date.

5. Is a bill of exchange always negotiable?

Yes, a bill of exchange is a negotiable instrument that can be transferred to another party through endorsement.