Bill of Exchange

Posted on by user

What is a bill of exchange?

A bill of exchange is a written, negotiable order binding one party to pay a fixed sum to another party either on demand or at a specified future date. Commonly used in international trade, it functions as a payment instrument that can be transferred by endorsement and helps parties manage credit and payment timing.

Key features

  • Parties involved:
  • Drawer — the party that issues the bill and orders payment (usually the seller/creditor).
  • Drawee — the party ordered to pay (usually the buyer/debtor).
  • Payee — the party who receives the payment (may be the drawer or a third party if endorsed).
  • Payment timing:
  • Payable on demand (sight) or at a future date (time).
  • The period between billing and payment is called the usance (e.g., 30, 60, 90 days).
  • Transferability:
  • Typically negotiable and transferable by endorsement.
  • Acceptance:
  • The drawee must accept the bill (usually by signing) for it to be valid as an unconditional obligation.
  • Interest:
  • Bills normally do not bear interest unless the instrument specifies an interest rate for late payment.

Common types

  • Bank draft — issued and guaranteed by a bank; the bank is responsible for payment.
  • Trade draft — issued by individuals or trading firms in ordinary commercial transactions.
  • Sight draft — payable immediately or on presentation; allows exporters to release goods against immediate payment.
  • Time draft — payable at a specified future date; gives the buyer a grace period after receiving goods.

How bills of exchange are used

Bills of exchange facilitate payment and credit in cross-border trade by:
* Allowing sellers to obtain a written, transferable claim for payment.
* Letting buyers receive goods with a deferred payment obligation.
* Reducing risks from differing legal systems and exchange-rate timing by standardizing payment terms.

Example

Car Supply XYZ sells auto parts to Company ABC for $25,000. Car Supply XYZ (drawer and payee) draws a bill of exchange stating Company ABC (drawee) will pay $25,000 in 90 days. Company ABC accepts the bill and the goods are shipped. In 90 days, Car Supply XYZ presents the bill and receives payment.

How a bill of exchange differs from similar instruments

  • Check — A check is payable on demand; a bill of exchange can be payable on demand or at a future date and is more commonly used in trade contexts.
  • Promissory note — A promissory note is a promise by the maker (debtor) to pay the payee and is generally not transferable in the same way; a bill of exchange is an order from a creditor directing a third party to pay and is typically negotiable.

Summary

A bill of exchange is a negotiable payment order widely used in international trade to formalize and transfer payment obligations. It clarifies who must pay whom and when, can be endorsed to third parties, and requires acceptance by the drawee to create a binding obligation.