What is a bill of exchange?
Bill of exchange is an order, mainly used in foreign trade, where two parties are involved and one party is required to pay a fixed amount of money to another party, on a given date or on-demand. Exchange bills work similar to cheques and promissory notes. They can be drawn by individuals or banks and can be passed along through endorsements.
Bills of exchange: Types
Following are the types of bill of exchange:
- Draft bank: Bank gives the bill of exchange
- Trade draft: Individuals release the bill of exchange
- Sight or term bill: When the funds are to be paid immediately.
Bills of exchange: Working
Up to three parties can be included in a trading bill:
- The one, who is paying the amount mentioned in the bill is called the drawee.
- The one who initiates the bill is called the drawer.
- The payee of the bill is the one who enforces the transaction.
Bill of exchange: Key features
In a bill of exchange, the drawer and the payee are the same person, since there is no third party involved as the drawer does not move the bill of exchange to a third party.
A bill of exchange is a written document detailing the debtor debts to the creditor. It is not payable on demand, and is generally extended with 90 days on credit. To make it valid, the drawee must accept the bill.
Bills of exchange usually do not gather interest, but add up interest unless paid by a specified date, in which case, the rate must be mentioned on the bill. They can be transferred at a discount before the time stated for payment.
