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
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.
Bills of exchange can be classified into two categories. They are as follows:
See Also: Foreign Exchange Market In India
Listed below are some of the important features of the bills of exchange:
See Also: What is E-way bill?
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.
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.
As instruments of credit the bills of exchange also have some disadvantages. They are as follows:
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