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LEGAL DICTIONARY

Bill of Exchange

What Is a Bill of Exchange?

A bill of exchange is a debt instrument used by banks and other financial institutions to oblige money owed to be paid. They are legally binding in nature and are most often used in international trade.

Bills of exchange can be known by several names including:

  • International bill of exchange
  • Bank note
  • Draft
  • Order of payment

Knowing when and how to use a bill of exchange can prove highly useful if you are required to pay or create a legal document like this. Below we discuss the finer details of these forms and what you will need to consider if you ever deal with one yourself.

Parties Involved with a Bill of Exchange

A number of different parties can be involved in the creation and use of a bill of exchange. However, this can usually be narrowed to three key individual parties, which includes:

  • Drawee: This is the person or company who owes the money.
  • Payee: The party that receives the money owed.
  • Drawer: The person or company who is obliged to pay the money to the payee (usually the same party as the drawee).

What Information is Included in a Bill of Exchange?

A bill of exchange is a relatively simple debt note that exists in a number of different formats but there are several essential items of data you must include. In order for these bills to work as intended you must include the following information:

  • The amount to be paid
  • The date when payment must be made
  • The name of the payee
  • A unique identifying number
  • The signature of the payee

Types of Bill of Exchange

The type of bill of exchange used at any time varies depending on who has issued it and why. These forms may be known by different names if they have been created and used by a specific party. This includes the following cases:

  • Issued by a bank: Bank Draft
  • Issued by an individual: Trade Draft
  • To be paid on demand: Sight Draft
  • To be paid on a set date: Time Draft

Bill of Exchange Vs. Promissory Notes

There are many similarities between bills of exchange and promissory notes. They are both debt instruments that can oblige a borrower to pay back a lender. However, there are also some very significant differences between the two.

First and most importantly, bills of exchange do not charge the drawee interest in the majority of cases. However, interest is sometimes added to the amount payable if it is not paid within a certain timeframe.

Promissory notes on the other hand usually have interest payments written into their terms. The interest payments will make up part of the final amount of money that must be paid and will be charged in addition to the original principal.

Additionally, promissory notes cannot be exchanged or transferred. Bills of exchange on the other hand can be adjusted and paid by a different entity to the original drawee.

What Is a Bill of Exchange?

A bill of exchange is a debt instrument used by banks and other financial institutions to oblige money owed to be paid. They are legally binding in nature and are most often used in international trade.

Bills of exchange can be known by several names including:

  • International bill of exchange
  • Bank note
  • Draft
  • Order of payment

Knowing when and how to use a bill of exchange can prove highly useful if you are required to pay or create a legal document like this. Below we discuss the finer details of these forms and what you will need to consider if you ever deal with one yourself.

Parties Involved with a Bill of Exchange

A number of different parties can be involved in the creation and use of a bill of exchange. However, this can usually be narrowed to three key individual parties, which includes:

  • Drawee: This is the person or company who owes the money.
  • Payee: The party that receives the money owed.
  • Drawer: The person or company who is obliged to pay the money to the payee (usually the same party as the drawee).

What Information is Included in a Bill of Exchange?

A bill of exchange is a relatively simple debt note that exists in a number of different formats but there are several essential items of data you must include. In order for these bills to work as intended you must include the following information:

  • The amount to be paid
  • The date when payment must be made
  • The name of the payee
  • A unique identifying number
  • The signature of the payee

Types of Bill of Exchange

The type of bill of exchange used at any time varies depending on who has issued it and why. These forms may be known by different names if they have been created and used by a specific party. This includes the following cases:

  • Issued by a bank: Bank Draft
  • Issued by an individual: Trade Draft
  • To be paid on demand: Sight Draft
  • To be paid on a set date: Time Draft

Bill of Exchange Vs. Promissory Notes

There are many similarities between bills of exchange and promissory notes. They are both debt instruments that can oblige a borrower to pay back a lender. However, there are also some very significant differences between the two.

First and most importantly, bills of exchange do not charge the drawee interest in the majority of cases. However, interest is sometimes added to the amount payable if it is not paid within a certain timeframe.

Promissory notes on the other hand usually have interest payments written into their terms. The interest payments will make up part of the final amount of money that must be paid and will be charged in addition to the original principal.

Additionally, promissory notes cannot be exchanged or transferred. Bills of exchange on the other hand can be adjusted and paid by a different entity to the original drawee.