While payments are an integral part of a business, you’d know that ensuring payment inflow isn’t effortless if you’ve ever chased an invoice. Thus, a bill of exchange is curated to keep everybody liable for making timely payments. 

The Negotiable Instruments Act 1881 regulates the provisions for bills of exchange. As per Section 5 of this specific act, it’s an instrument in writing that contains total order signed by the maker, directing a particular individual to pay an amount sum of money to the instrument’s bearer.

When such an order is acknowledged in writing, it becomes a legal bill of exchange. In this post, let’s find out everything about the bills of exchange. 

What is Bills of Exchange in India?

If we have to define the bill of exchange, it is a formally written IOU that cites when a specific amount of money must be paid. This is a bill that a person draws to direct another person to pay the money to somebody else. If accepted, somebody has to pay the amount; it becomes real. 

Generally, the seller provides a credit period to the buyer upon selling products or services. For example, suppose A orders B to pay Rs.10,000 for 100 days after the date, and B accepts the order by signing the bill. Then, it will become a bill of exchange. 

However, there are certain situations when the seller may not be in the position to provide a credit period to the buyer. And then, the buyer may not be in a position to pay instantly. 

In such a scenario, the seller would ask the purchaser to give a written promise to pay the sum of money on a specific date. This written promise becomes a valuable credit instrument when properly made and stamped. 

Often, banks accept these written instruments, and you can withdraw money against them. Moreover, you can also endorse the instrument, meaning you can pass it to somebody else. 

Parties to a Bill of Exchange

A bill of exchange has three different parties, such as:

Drawer

  • A drawer is the creator of the bill of exchange
  • They have to sign the bill
  • A creditor who is permitted to get payments from the debtor can draw the bill


Drawee

  • Drawee is somebody upon whom the bill is drawn
  • He is the debtor who should pay the drawer
  • A drawee is also called an Acceptor


Payee

  • The payee is somebody to whom the payment should be made
  • The payee could be either the drawer himself or the third party

Example of Bills of Exchange

Let’s take up an example here to understand bills of exchange in a better way. Suppose Mr Sharma has drawn a bill on Mr Bansal for three months for Rs.1,00,000. The bill is payable to Mr Gupta on 17th June 2022. 

Mr Sharma ordered Mr Bansal to pay Rs.1,00,000 to Mr Gupta. If Mr Bansal accepts the order, he will write a bill as follows:

Accepted

Mr Bansal

Delhi

17th June 2022

When the drawee pens down this type of acceptance on the bill, it turns into a bill of exchange. In the example above, Mr Sharma is the bill’s drawer, Mr Bansal is the acceptor, and Mr Gupta is the payee. In the end, Mr Bansal will pay the money to Mr Gupta.

Features of Bills of Exchange

Here are the features of bills of exchange:

  • It comes with the date by which the money should be paid.
  • The amount is payable to the person whose name is mentioned on the bill or to their bearer.
  • A bill of exchange should have a revenue stamp.
  • The bill payment should be in the legal currency of the nation.

Format of a bill of exchange

Here is a format of a bill of exchange 

 Stamp                                                                          Name and address

Amount                                                                          Date             

One month after the date pay to (name and address of payee) or order, the sum of (mention the amount) for value

Accepted     Drawer

(Signed)     (Signed)

Drawee’s name     Drawer’s Address

Drawee’s Address

Types of Bills of Exchange

Jotted down below are the types of bills of exchange for your reference:

  • Documentary Bill: Here, the bills of exchange are supported by related documents that validate the authenticity of the transaction or sale between the buyer and the seller.
  • Supply Bill: This is a bill that a contractor or a supplier withdraws from the government.
  • Demand Bill: This bill is due when it is demanded, as the name implies. There is no set payment date on the demand bill. Thus, it should be cleared whenever put forth.
  • Trade Bill: This type of bill is relevant only to trade.
  • Usance Bill: This one is a time-bound bill. It means the payment must be made within the given time.
  • Accommodation Bill: An accommodation bill is the one that is sponsored, drawn and accepted without conditions.
  • Inland Bill: It is payable only in one nation. In this bill, both the acceptor and the drawer live in the same country. 
  • Foreign Bill: Opposite the inland bill, this one can be paid outside the country. For instance, import bills and export bills.
  • Clean Bill: This bill doesn’t have any documented proof. Thus, the interest is higher as compared to other bills.  

Discounting Bills of Exchange

A payee could sell a bill of exchange to a different party for a discounted price to acquire funds before the payment date that is put on the bill. The discount signifies the interest cost that is related to being paid early. 

Difference between promissory notes, bills of exchange, and cheques 

Bills of exchange and promissory notes confirm a financial transaction between two parties. In international trade, bills of exchange are more common than promissory notes. A promissory note is an informal loan document. It’s a written document that guarantees to pay a specified sum to a specific person or the instrument’s holder.  A cheque is considered a negotiable instrument. One person/party instructs the bank to transfer money to another’s account by cheque. Cheques are safe and secure because they don’t involve cash.

Conclusion

 Now that you have understood everything about the bills of exchange, you will be able to use them better. Also, know that the bill matures when the tenure expires. Thus, the maturity of the bills of exchange is defined as the tenure’s end.