What is a Bill of Exchange?

A bill of exchange refers to a financial instrument explicitly used for international trade to bind one party to pay a specified amount of money to the holder of the document or another designated person. The bill of exchange is paid after a specified term or on-demand. Other financial instruments similar to a bill of exchange are promissory notes and checks that can be drawn by banks or individuals and are also transferable through endorsements. 

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How Does a Bill of Exchange Work?

Bills of exchange are usually used when there is a business transaction that involves credit purchases. In this case, the creditor (seller) will issue the debtor (buyer), or a financial entity acting as intermediary, a bill of exchange based upon what is owed for the goods. Note that for a bill of exchange to be valid, the debtor (or drawee) has to accept it first. After acceptance, the bill of exchange creates the obligation for the buyer or drawee to pay the creditor.

Who are the Parties Involved in a Bill of Exchange? 

Though there are several parties involved in a bill of exchange, the most common and main entities are as follows:

• Drawer: This is the party that makes the bill ordering the payment of a specified amount of money. This party is the drawer of the instrument and obliges the drawee to make payments to the payee.
• Drawee: This is an entity that receives the bill of exchange directing him to make payment of the specified amount of money.
• Payee: This party is the one that receives a payment made by the drawee as specified in the bill of exchange.

What are the Types of Bill of Exchange?

There are two types of bills of exchange. A bill of exchange issued by a banks is known as bank drafts. If an individual issues the document, it is known as a trade draft. The two types of bill exchange are as follows:

• Sight bill: This is a type of bill of exchange where payment is immediate payment or on-demand.
• Term bill: With this type of bill of exchange payment is for a later date (payment is made at a specified time in the future).

Bill of Exchange Features During a business transaction where be buyer purchases the goods on credit, the seller prepares the bill typically and sends it to the purchaser of goods (or a drawee bank) for acceptance. The bill usually contains specific details such as:

• Name and the address of the buyer and seller
• The billing amount
• Bill maturity date
• Signatures and stamps of both parties (seller and buyer)

A bill of exchange is transferable. The payee can legally transfer the bill to another entity through what we call an endorsement, generally done at the back of the document.

Related Topics

• Commercial Paper (Intro)
• What is Commercial Paper?
• Negotiable Instrument
• What are the common types of commercial paper?
• Promissory Note
• Cashier's Check
• Convenience Check
• Certified Check
• Substitute Check
• Bill of Exchange
• Bank Draft Definition
• Sight Draft Definition
• Bankers Acceptance 
• Who is a Holder of a negotiable instrument?
• Commercial Paper Funding Program
• What is Negotiability and why is it important?
• What is required for commercial paper to be negotiable?
• Sum Certain (Contracts)
• Inflation Adjustment Clause
• When does commercial paper contain an Unconditional promise to pay?
• Backup Line of Credit
• What is Payable on Demand or Payable on Time?
• What is Order Paper and Bearer Paper?
• Bearer Form
• How is a payee identified on the negotiable instrument?
• What rules does the court apply in determining negotiability?
• How is commercial paper negotiated to a holder?
• What is Transfer of a negotiable instrument?
• What is Indorsement of a negotiable instrument?
• What are the various types of indorsement?
• Bank Endorsement
• Blank Endorsement
• Accommodation Endorsement
• How does a holder receive payment on a negotiable instrument?
• Who is potentially liable on (or obligated to pay) a negotiable instrument?
• When is an individual liable for a representative signing a negotiable instrument?
• What rules apply if a holder loses a negotiable instrument?
• When is payment of a negotiable instrument overdue?
• What effect does a negotiable instrument have on the underlying obligation?
• What is a holder in due course?
• What are the requirements for a holder to become a holder in due course?
• Receive an instrument for value?
• Receive an instrument in good faith?
• Receive an instrument without notice of a valid defense?
• How does discharge of the Underlying Obligation affect a holder in due course?
• What is the Shelter Rule?
• Can you limit a transferee from becoming a holder in due course?
• Personal Defenses?
• Real Defenses?
• What is a Claim in Recoupment?
• What are the rights of a holder in due course if the instrument involves a consumer transaction?
• What happens if a negotiable instrument is Forged?
• What happens if a negotiable instrument is Stolen?
• Guaranty or Guarantee
• Letter of Guarantee
• Personal Guarantee
• What is the role of a Guarantor or Surety of a negotiable instrument?
  
• Surety 
  
• Cosign
• Accommodation Paper Definition
• Secondary Liability
• Avalize Definition
• What is an Accord & Satisfaction?
• What is primary and secondary liability on an instrument?
• What is Drawer or Maker Liability for a negotiable instrument?
• What is Transferor Warranty of a negotiable instrument?
• What is Indorser Warranty of a negotiable instrument?
• What is Presentment Warranty of a negotiable instrument?
• What is a warrantors liability for a dishonored note or draft?
• What is the time limitation for warranty of a negotiable instrument?
• When are the warranties of a negotiable instrument discharged?