“According to the International Chamber of Commerce (ICC), the total value of all bills of exchange in circulation worldwide was approximately $4.4 trillion in 2020.’’
What is a Bill of Exchange?
A bill of exchange is a written order from one party (the drawer) to another (the drawee) to pay a specified amount of money on demand or at a predetermined date. The document is commonly used in international trade transactions, allowing one party to make a payment in one currency while the other party receives payment in another currency.
How does a Bill of Exchange work?
A bill of exchange is an order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money to the order of a specified person or to the bearer.
In other words, it is a written order from one person (drawer) to another (drawee) to pay a certain amount of money to a certain person (payee) or to the bearer of the bill. The holder of the bill can present it to the drawee for payment on the due date.
Features of Bill of Exchange
Let’s have a look at the features of the bill of exchange.
- It is a legally binding document that orders one party to pay a fixed sum of money to another party.
- It contains the names and addresses of the parties involved, the amount of money to be paid, the date of payment, and a description of the goods or services being exchanged.
- It is signed by both parties to acknowledge the transaction.
- It can be drawn in any currency and is usually settled in the currency of the country in which it was issued.
- It is also transferable and can be endorsed to another party.
- It also serves as a guarantee of payment and is usually accompanied by a promissory note.
- If it is not paid on the due date, the holder can take legal action to enforce the payment.
Types of Bill of Exchange
Here are the various types of bills of exchange. Let’s have a look.
- Sight Bill of Exchange: This is payable on demand or on a set date after the bill is presented.
- Time Bill of Exchange: This is payable on a set date and not on demand.
- Usance Bill of Exchange: This is payable after a set period of time, typically several months.
- Trade Acceptance Bill of Exchange: This is used in international trade and is generally accepted by the seller of goods to the purchaser.
- Accommodation Bill of Exchange: This is created for the purpose of providing financial accommodation to a third party such as a family member or friend.
Parties of Bill of Exchange
The parties involved in a bill of exchange are the drawer, drawee, and payee.
➡️The drawer is the person who draws up the bill of exchange.
➡️The drawee is the person to whom the bill is addressed and who is expected to pay the bill when due.
➡️The payee is the person who is to receive payment from the drawee.
Example of Bill of Exchange
Bill of Exchange
To: ________________________ (Name of Payee)
Pay: ______________________ (Name of Payor)
Sum of: ___________________
(Amount in words)
(Amount in figures)
Accepted payable at ___________________ (Bank, location)
On or before: ______________________ (Date)
For value received, I promise to pay the above sum of ______________ to __________ or order in the above-mentioned place.
Signature: ___________________ (Name of Payor)
Importance of Bill of Exchange
It is an important financial instrument used in international trade. It is a formal document between two parties that outlines the terms of a transaction.
➡️ It provides a means of payment, security, and certainty of payment to both the buyer and seller.
➡️ It is also a legal document that can be used in court as evidence of a contract.
➡️ It also serves as a source of credit and helps facilitate the transfer of funds between two parties.
➡️ By using it, traders are able to conduct business without the need for cash.
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Frequently Asked Questions
What is a bill of exchange?
A bill of exchange is a written order from one person (the drawer) to another person (the drawee) to pay a specified sum of money to a third person (the payee) at a specified date or on demand.
What are the parties involved in a bill of exchange?
The parties involved in a bill of exchange are the drawer (the issuer), the drawee (the person/entity to whom the bill is addressed), and the payee (the person/entity to whom the payment is to be made).
What are the different types of bills of exchange?
The different types of bills of exchange are demand bills, sight bills, time bills, usance bills and acceptance bills.
What are the legal implications of bills of exchange?
The legal implications of bills of exchange depend on the jurisdiction in which the bill is issued and the laws governing it. Generally, a bill of exchange creates a legally binding obligation between the parties involved, and the drawee is obligated to make the payment to the payee as specified in the bill.
What is an acceptance bill?
An acceptance bill is a type of bill of exchange in which the drawee acknowledges the payment obligation and agrees to pay the bill at a specified date.