What is a Bill of Exchange?
A bill of exchange is a written order used mainly in foreign trade, requiring one party to pay a fixed amount of money to a different party, on-demand or at a set date. Exchange bills are similar to checks and promissory notes—they can be drawn by individuals or banks, and can usually be passed by endorsements.
How Does It Work?
A trading bill can include up to three parties. The drawee is the party paying the amount specified by the bill of exchange. The payee is the one who gets the number. The drawer is the party where the drawee is obliged to pay the payee. The payee and the drawer are the same people because the drawer does not move the bill of exchange to a third-party payee.
Nevertheless, unlike a check, a bill of exchange is a written document detailing a debtor's debt to a creditor. This is not payable on request and is generally extended with terms of credit, such as 90 days. Also, the drawee must accept a bill of exchange for it to be valid.
Exchange bills do not usually incur interest, making them post-dated payments in essence. They can still accrue interest unless paid by a specific date, in which case the rate must be stated on the instrument. Conversely, they may be transferred at a discount before the date of payment stated.
Types of Bill of Exchange
If a bank issues a bill of exchange, it can be referred to as a draft bank. If individuals release them, they may be referred to as trade drafts. Whether the funds are to be charged immediately or on delivery, the bill of exchange is known as a sight bill; it is also known as a term bill since they are to be charged at a specified date in the future.
