What is Bill of Exchange?

What is bill of exchange (BOE)?

A written, unconditional order by one party to another to pay a certain sum, either immediately or on a fixed date for payment of goods and services received.

A bill of exchange or draft is a written order by the drawer to the drawee, to pay money to the payee. A bill of exchange is a document used in international trade to pay for goods and services. It is signed by the person promising to pay, and given to the person entitled to receive the money. The bill may specify that payment is due on demand, or at a specified future date. A bill of exchange usually involves a buyer, seller and each side’s bank.

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SEE ALSO: Shop And Establishment Act

Bill of exchange in India

According to the Negotiable Instruments Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. In India these instruments are governed by the Indian Negotiable Instruments Act 1881.

Types of bill of exchange:

 Bills of exchange can be classified into two categories. They are as follows:

• Bills of exchange payable on sight: These types of bills are payable on demand and the drawee has to pay the amount when the bill is presented to him for payment.
• Bills of exchange payable after a certain period of time: These bills become payable after a certain period of time. These types of bills are also called Term Bills.

See Also: Foreign Exchange Market In India

Features of bills of exchange:

Listed below are some of the important features of the bills of exchange:

• It is an instrument in writing.
• It contains an unconditional order to pay. It means that no conditions can be attached for making the payment.
• It mainly involves three parties: Drawer, Drawee and Payee. In most of the cases, the Drawer and Payee is the same person as the Drawer draws the bill in his/her favour. However it must be remembered that the Drawer and Drawee cannot be the same person.
• The maker of the bills of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain. 
• The bills of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirements of law.

See Also: What is E-way bill?

Importance of bill of exchange:

There are certain risks vis-à-vis exports that may be unfamiliar to business owners who are used to trading domestically. A bill of exchange helps to counter some of the risks involved with exporting. Long-term trading arrangements between firms in different countries can be badly impacted by exchange rate fluctuations, so the fixed payment terms that are laid out in a bill of exchange provides exporters with the assurance of a fixed price.

It also provides an exporter with protection. By drawing up a bill of exchange with their bank and submitting it to importer’s bank, an exporter gains an agreement that it will not have to chase its importer for payment, if that company fails to honour the agreement and pay the bill.

Advantages of bills of exchange:

The bills of exchange as instruments of credit are used frequently in business because of the following advantages:

• Framework for relationships: It is an instrument which provides the framework for enabling the credit transaction between the seller or creditor and buyer or debtor on an agreed basis.

• Certainty of terms and conditions: The creditor knows the time when he would receive the money and the debtor is also fully aware of the date by which he has to pay the money. This is due to the fact that terms and conditions like amount required to be paid; date of payment; interest to be paid, if any, place of payment are clearly mentioned in the bills of exchange.

• Convenient means of credit: A bill of exchange enables the buyer to buy the goods on credit and pay after the period of credit. However, the seller of goods even after extension of credit can get payment immediately either by discounting the bill with the bank or by endorsing it in favour of a third party.

• Conclusive proof: The bill of exchange is legal evidence of a credit transaction implying that during the course of the trade, buyer has obtained credit from the seller of the goods; therefore, he is liable to pay the seller.

• Easy transferability: A debt can be settled by transferring a bill of exchange through endorsement and delivery.

Disadvantages of bill of exchange:

As instruments of credit the bills of exchange also have some disadvantages. They are as follows:

• The bills of exchange are mainly used for short term service. Generally bills of exchange are not considered to be a good option for banking services.
• In case the bills of exchange are accepted by the bank, then it is an additional burden on the person who was drawn it.
• The discount allowed in the bills of exchange is also like an additional cost.
• The drawee is liable to pay the bills in time as the date of payment is fixed.

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