A bill of exchange is a legal document organized by one party to the other in order to make a certain amount of payment as soon as possible or within a limited time frame. This payment is then made for the goods or services that have been received. One party accepts the bill, which he can either convert it into a post-dated check or make it a binding contract. A bill of exchange is often known as a draft but all drafts are not negotiable. These are mostly used to finance trade to achieve credit.
Essential Elements of Bills of Exchange
A bill of exchange introduction would require you to get familiarized with a few terms and also the elements of bills of exchange. Let us first learn some terms:
- Drawer: This is the maker of the Bill of exchange.
- Drawee: The person who has been directed to pay the sum of money mentioned in the Bill is referred to as the drawee.
- Payee: The person who will be receiving the money is termed as the payee.
- Holder: When the payee is in Bill’s custody, he is referred to as the holder. The holder must provide the Bill to the drawee for the latter’s acceptance.
- Acceptor: When the drawee signs the Bill of exchange as a mark of his acceptance, then he becomes the acceptor of the Bill.
- Drawee in Case of Need: At times, another person’s name is mentioned in the Bill of exchange, who would accept the Bill in case the original drawee does not accept the Bill. This 3rd person is called drawee in case of need.
- Endorser: If the bill holder endorses it to another person, then he will be called an endorser.
- Endorsee: This is the person to whom the Bill of exchange has been endorsed.
Types of Bills of Exchange
There are mainly two types of bills of exchange:
- Bills of Exchange Payable at Sight – They are payable on demand. When the Bill is given to the drawee, he or she must pay the amount.
- Bills of Exchange after a Certain Period– This is also called term draft and becomes payable after a certain time period.
Advantages of bill of exchange
- Legal document: A bill of exchange is a legal written document under the Negotiable Instruments Act, 1881. It involves less risk, in case of debt involvement.
- Ease in credit transactions: A bill of exchange is a written unconditional promise to pay. Hence, credit transactions of purchases and sales can be carried out with ease, based on agreed terms.
- Recovery of amount: As the time at which money would be received is predetermined, the creditor must know when he/she would recover the amount. If the bill is dishonoured, it is easier to recover the amount because of its legality.
- Discounting facility: As the bill can be discounted with the bank, the creditor can receive the funds immediately from the bank. This is done in case of emergencies and the bank can later on collect the amount from the drawee of the bill.
- Endorsement of the bill: The bill can be endorsed to another person and serves the similar purpose as cash.