What is Acceptance of a Bill of Exchange?

A bill of exchange is a written document that serves as an order or a promissory note obliging a drawee (generally a financial institution) to make a specified payment to the payee. The acceptance of a Bill of Exchange is a procedure that involves the acceptance of a seller's bill of exchange by the drawee. 

An acceptance refers to the scenario where a third party consents to the payment of a draft or bill of exchange. Banks or financial institutions often play the role of an acceptor in a bill of exchange. This is known as a Bank Acceptance. If the buyer serves as the acceptor of a draft, this is known as a trae acceptance. In either event, the acceptor takes responsibility for the payment of checks or credits on or before the maturity date.

The drawee often finalizes his acceptance by signing under the words 'accepted' on the face of the bill, which essentially turns him into an acceptor. Post acceptance, the bill of exchange is converted into a post-dated check that places an unconditional obligation on the part of the acceptor to make the payment on or before its maturity date.

How is an Acceptance of Bills of Exchange Used?

In simple terms, the acceptance of a bill of exchange is a guarantee of payment extended by the drawee towards the order of the drawer. Acceptance is vital because without it, the drawee of the bill is under no legal liability to make the payment on any bill addressed to him. Any bill of exchange involves two or three parties:

• The drawee, or the debtor, who is obliged to make the payment,
• The payee, or the creditor, who receives the payment, and
• The drawer, who facilitates the payment by the drawee to the payee.

Often, the drawer and the payee refer to the same entity, unless the drawer explicitly delegates the responsibility of a payee to a third party. A bill of exchange specifies a due date for payment which is usually 90 days. However, certain bills also enable the payee to encash the bill of exchange before the due date by accepting a discounted cash amount from the drawee.

Types of Bills of Exchange

There are four types of bills of exchange. They are

• Bills of Exchange payable at sight.
• Bills of Exchange payable on fixed dates.
• Bills of Exchange drawn after specified periods of time
• Bills of Exchange payable to a term from the hearing

There are certain requirements that a bill of exchange has to satisfy in order to be considered legally binding. These are:

• Identification of the Drawee: This process involves establishing the full identity credentials of the drawee.
• Date and place of issuance: It is mandatory to mention the date and place of issue of the bill of exchange.
• Amount: The amount of payment must be clearly mentioned in letters as well as numbers. In case the payment is made in a foreign currency, it is also necessary to specify the currency on the bill of exchange in addition to the prevailing exchange rates between both currencies on the date of payment.
• Maturity date: A bill of exchange that is payable after a specified time must indicate the date of maturity, i.e the date on which it is due for payment. Usually, three days of grace are added to every bill of exchange.
• Drawer details: A bill of exchange must also indicate particulars of the drawer, such as name/business name and address.
• Bank Account: It is also mandatory for a bill of exchange to mention the details of the bank where the drawee is required to pay the amount stated in the bill.
• Acceptance: All parties involved in a bill of exchange need to accept the terms and conditions implied in the bill and endorse their acceptance with signatures. Besides, it is also mandatory to indicate the date and place of signing of the bill of exchange. Acceptance usually includes an unconditional pledge by the drawee to pay the amount specified in the bill.

Illustration of a Bill of Exchange

Suppose, company C1 purchases machinery components worth $100,000 from supplier S1. As such, S1 prepares a bill of exchange for $100,000, that is payable in 90 days. In this example, C1 is the drawee, while S1 is both the drawer as well as the payee. After C1 formally accepts the bill of exchange, the goods are shipped by S1. As specified in the terms, S1 presents the bill of exchange to C1 after the expiration of 90 days.