Bill Of Exchange - Definition & Advantages of Bill Of Exchange

What is a Bill of Exchange? 

A bill of exchange is a document issued by a debtor to a creditor, promising to pay a certain sum at a specified time. This can be used as collateral, meaning if the debtor fails to pay, the creditor can take this bill and get payment from a third party. 

Issuing and Negotiating Bills of Exchange 

Below are the steps involved in issuing and using bills of exchange: 

1. Creation: The debtor (drawer) creates a bill of exchange, specifying the payee, amount, and due date.
2. Presentation: The bill is presented to the drawee, who can accept or refuse the bill.
3. Endorsement: The payee can endorse the bill to make it payable to someone else in either bearer or order form.
4. Discounting: The payee can sell the bill to a bank before its due date to receive funds immediately.
5. Payment: On the due date, the drawee must pay the money to the holder of the bill.

Different Types of Bills of Exchange 

There are three types of bills of exchange: 

i) Trade bills: These are predominantly used in international trade transactions. 

ii ) Accommodation bills: These are used to help finance a purchase. 

iii) Sight bills: These mature faster and are used for time-sensitive transactions. 

Advantages of a Bill of Exchange 

The benefits of a bill of exchange include: 

• Enhanced security for the recipient: The bill can be used as loan collateral, and if the borrower defaults, the lender can use the bill to receive payment.
• Facilitation of international trade: Banks often accept bills as loan collateral, allowing businesses to finance imports and exports without using their own capital.
• Hedging against currency risk: Businesses can buy bills in foreign currencies to offset any losses if the currency's value falls.

Conclusion 

A bill of exchange is a legal document signifying debt. It offers payment security, making it less vulnerable to forgery than other payment methods such as cheques.