What Is A Bill of Exchange?

One of the terms frequently used in international shipping is the bill of exchange. A bill of exchange is a document. The seller or exporter prepares this document and forwards it to the buyer or importer. This document is a negotiable instrument. Thus, it guarantees a certain amount of payment to a certain person. Another name for the bill of exchange is draft.

The bill of exchange is legally binding. It requires the buyer to pay the seller within a certain time frame. The buyer usually pays after receiving the goods. Sometimes the buyer has a certain period after receiving the goods. For example, he can make the payment within 10 days after receiving the goods. Yet, a bill of exchange is not a contract. But, parties can use it to specify the terms of a transaction. These terms can be loan terms and accrued interest rates.

A bill of exchange is an unconditional written order. The seller instructs the seller’s bank to pay a specified amount. The seller can get a suitable form from his bank. Also, he can issue the document on a blank sheet of paper. A bill of exchange helps importers and exporters to fulfill transactions in international trade.

Parties to Bill of Exchange

A bill of exchange generally involves three parties. These parties are drawee, payee, and drawer. Drawee pays the amount. The payee is the party to which the payment is made. The drawer is the party that forces the drawee to pay the payee. Besides, the endorser, endorsee, and bearer are parties to the bill of exchange. Endorser transfers payment rights. The drawer endorses the bill of exchange in favor of the endorsee. The bearer is the person holding the bearer bill o exchange.

Information Included in Bill of Exchange

The bill of exchange includes the name and address of the payee. The amount to be paid, the date of payment, and the identification number are also in this document. Also, the bill of exchange has a signature section. A person authorized to undertake to pay the specified amount of funds to the drawee signs the document.

Types of Bill of Exchange

Demand Bill

Another name for a demand bill is the sight bill of exchange. As the name suggests, in the bill on demand, there is a payment if there is a demand. Bill on demand does not have a fixed payment date. In this bill type, the drawee makes the payment. In international trade, the demand bill allows the exporter to keep ownership of the exported goods. The exporter holds the ownership until the importer receives the delivery and pays.

Documentary Bill

In the documentary bill, some documents support the bill of exchange. These documents confirm the authenticity of the sale or transaction. The transaction takes place between the seller and buyer. There are two types of documentary bills. These are documents against acceptance and documents against payment.

  • D/A (Documents against acceptance): With the D/A, the exporter instructs the presenting bank to issue the shipping and title documents to the importer. However, for this, the importer must accept and sign the relevant policies.
  • D/P (Documents against payment): With D/P the consignee/importer receives the shipped documents only after the buyer's bank collected the payment.

Usance Bill

Another name for usance bill is time bill. Because it specifically indicates the time and due date of the payment. Thus, the usance bill is a time-bound document.

Clean Bill

A clean bill does not have a proof document. Since this invoice does not contain any documents, the charges for this invoice are higher compared to other types. Moreover, with a clean invoice, interest rates are high. Because there is no document in this bill type.

Inland Bills

An inland bill is a document payable only in one country. Hence, the inland bill is not payable in another foreign country.

Foreign Bills

Foreign bills are the opposite of inland bills. Thus, the relevant party in a country prepares foreign bills. Yet, the foreign bill is payable in another country.

Accommodation Bill

This bill serves both parties. It helps the parties without a transaction. It does not entail buying or selling any products or services. An accommodation bill is an agreement between two parties to provide financial assistance.

Trade Bill

Trade bill is common in international trade. If the parties prepare and approve the bill of exchange for a commercial transaction, the bill of exchange becomes a trade bill.

Supply Bills

The government office, suppliers, or contractors prepare the supply bills. The purpose of supply bills is to supply some goods. Supply bills help to get cash for pending payments from any financial institution to meet financial requirements.

Fictitious Bill

In a fictitious bill, the drawer, the drawee, or both are fictitious.

Importance of Bill of Exchange

Bills of exchange are helpful in cross-border commerce. Because they assist buyers and sellers in navigating the dangers of fluctuating exchange rates and varying legal systems.

Advantages of Bill of Exchange

A bill of exchange is a legal document. Hence, if the drawee does not make the payment on time, the drawer can legally recover the money. Moreover, if the drawer needs money urgently, the bill of exchange can help. The drawer can convert the bill into cash. Yet, he must pay some bank charges. Besides, the terms of the bill of exchange are final and do not change. Thus, there is no danger of changes.

A bill of exchange is unconditional. Hence, the drawee must pay the money when he receives the services specified in the invoice. Also, drawee should pay for the orders damaged due to some natural reasons. Yet, drawee does not have to pay if he hasn’t received the services mentioned in the document.

Risks of Bill of Exchange

The risk of a bill of exchange for businesses is that the drawee does not pay. Risks increase, especially if the drawee is an individual or a non-bank entity. Regardless of the drawee, the payee should research the creditworthiness of the issuer. If the drawee does not pay on the due date, the bill will be dishonored.

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