What is a Bill of Exchange? Types, Features, Importance, And More

Bills of exchange is a written negotiable instrument in the form of unconditional order signed by the maker directing a specific person to pay a certain sum of money on a specific date payable on demand or expiry of the fixed period only to the specific person or order of the specific person or the bearer of the instrument.

Parties to Bills of Exchange

  • Drawer: The person who draws or makes the bills of exchange. He signs the bill.
  • Drawee: the person on whom the bills of exchange are drawn. He is known as the acceptor. He has to pay money to the drawer.
  • Payee: The person named in the bills of exchange and who is entitled to payment mentioned in the bill of exchange.

Such bills are generally drawn by the creditor (drawer) upon the debtor (drawee). It is similar to a draft unless accepted by the debtor. Usually, the drawer and the payee are the same people.

Types of Bills of Exchange:

Bills of exchange are categorized as follows:

  • Inland Bill: An inland bill is a bill that is made payable in the home country only.
  • Foreign Bill: The bill made payable in a foreign country is called Foreign Bill.
  • Usance Bill: This bill covers the period within which the payment is to be made.
  • Clean Bill: This bill doesn’t include any documents as opposed to the documentary bill. Hence, the interest is higher than the other bills.
  • Demand bill: This bill is payable on demand. It has no fixed period of payment.
  • Accommodation Bill: The bill which is sponsored to help another person in need, drawn and accepted without any condition is known as an accommodation bill.
  • Documentary bill: They are very popular in trade circles. These bills are accompanied by a bill of lading, air consignment note, truck/lorry receipts, railway receipts.
Related article  Types of Financial Institutions (The List All of the Institution You Should Know)

Features of Bills of Exchange:

  • It must be duly stamped.
  • It must be in writing.
  • It must be signed by the maker.
  • It must be an unconditional order.
  • The payment must be certain.
  • The payment must be made to a certain person.
  • The payment must be made on a certain date.
  • The amount mentioned in the bill must be paid on-demand or on the expiry of the fixed time.

Advantages of Bill of exchange:

  • It is a legal document. If the drawee fails to make payment in due time, the drawer can recover the amount legally.
  • Discounting facility: When the drawer requires immediate funds, the bill can be converted into cash by discounting it from a bank by paying some bank charges.
  • Endorsement of bills can be done from one person to another for adjustment and discharge of the debt.
  • The terms of bills of exchange are certain and can’t be altered.

Format of Bill of Exchange:

Importance of Bills of Exchange:

  • Adequate time for payment: Importer buying goods and services gets sufficient time limit to pay for the purchase by negotiating in bills of exchange.
  • Legal action: It serves as a basis for taking legal action in case the buyer fails to make the payment on the due date.
  • The government gets the benefit of flourishment of foreign trade through bills of exchange. This enhances the per capita income of the country.
  • Clear terms and conditions: The bills of exchange are signed by the acceptor only after accepting and reading the clear terms and conditions of the bills of exchange.
  • Easy transfer: The bills of exchange can be easily transferred to a third party. By endorsement of the bill, the liability to pay can be transferred to the third party.
  • Mutual accommodation: Such bills are drawn to meet the financial need of others. In this case, the bill is issued to mutually accommodate the other party.
Related article  What is the Regular Interest? And how is it different from Accrued Interest?

Limitations of Bills of Exchange:

  • Bill of exchange poses an additional burden on the drawer if the bill is not accepted.
  • The discount allowed on the bill when encasing from the bank is an additional cost.
  • The drawee is liable to pay the bill in time as the period is fixed.
  • The bills have a physical form so they can’t facilitate electronic payment.
  • BOE has to exist in physical form, so it may be stolen, lost, or torn.
  • It becomes difficult for the drawer to plan the cash flow as the credit date is not certain. The drawee might dishonor the payment.