A bill of exchange is a legal document containing a written order to pay a certain amount of money to a specified person. The terms and conditions of the bill of exchange determine whether the money to be paid has a discount. The difference between the face value and the amount of money received is the discounted amount. The different types of bill of exchange can be classified based on the bill’s objective, time period and the territory involved. Some of the bills of exchange are demand bills, term bills and foreign bills to name a few.
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What is a bill of exchange
A bill of exchange is an unconditional order written by a drawer, addressed to a certain person to pay a sum of money to a specified individual, to the order of another person, or to the bearer of that instrument. It is a negotiable money market instrument used to finance trade related transactions. The drawer, the person who writes the bill, is the person who orders for the payment to be done. The person who pays the specified amount on demand or at a predetermined date is the drawee, the person to whom the bill is addressed to. The drawee accepts the bill by signing and writing across its face. Just like a cheque, a bill of exchange can be moved from one person to another. Thus, the holder of the bill can choose to hold onto it or endorse the bill with a discounting agency to obtain cash. There are normally 3 parties involved, the drawer, the drawee and the payee, where the payee is the person to whom the payment is to be made.
Documentary Bill of Exchange
A documentary bill is a type of bill of exchange which is accompanied by documents which contain the authenticity of a transaction that has taken place between a seller and a buyer. Such documents may be invoices, bill of lading or receipts. Examples of documentary bills of exchange are a document against acceptance bill and a document against payment bill. A document against acceptance bill is delivered only against acceptance of the bill, just as its name implies, and a document against payment is only delivered against the payment of the bill.
The second type of bill of exchange is a demand bill. It is also known as a sight bill and has no fixed date for payment. Also, no grace period can be given on a demand bill. Such a bill is only payable on demand, that is, payable when presented.
Term Bill of exchange
This type of bill of exchange is a time bound bill. It specifies the time period for payment. This bill has either a future time date or a determinable future time. Such bills contain payment terms such as ‘after date’ or ‘after sight’. When the term bill of exchange contains the payment term ‘after date’, it means that the due date of payment may be calculated from the date of the bill. When it contains payment terms such as ‘after sight’, it means that the due date for payments will be calculated from the date of presentation to the drawee for acceptance.
Inland bills are types of bills that are payable in the same country they are drawn. They can be seen as the opposite of a foreign bill.
A clean bill is a type of bill of exchange without documents of proof. Such bills charge higher interest rates.
A foreign bill is a type of bill of exchange that is payable in another country. Such bills are divided into 2, an export bill and an import bill. An export bill is drawn by an exporter for a person or a company in another country. An import bill is drawn by a person in another country to be issued in the domestic country.
This is a type of bill which is drawn without any condition. Similar bills arise due to trade transactions which are called genuine or bona fide bills. However, accommodation bills are drawn and accepted with no consideration passed or received. Such bills may be drawn for the purposes of borrowing from banks without actual transactions. This means, these bills may be drawn simply to oblige a friend in need of money so that s/he can raise funds. Such bills are known as windmills or wind bills where, the party signing as drawer or endorser does not receive any consideration for doing so. Instead, the drawer takes on primary liability by endorsing the bill without value in order to accommodate another party.
Trade bills are common in international trade. It is a type of bill which is drawn for the purpose of a trade order. This type of bill is drawn and accepted when there is a purchase or sale on credit. Such a bill is drawn by the seller of the goods and accepted by the buyer of the goods. When the trade bill is discounted the proceeds are enjoyed by the drawer only. Like all other bills, a trade bill is proof of an obligation or debt. If payment is not made by the drawee, legal action can be taken by the drawer against the drawee.
A supply bill is a type of bill of exchange drawn by a supplier or a contractor to supply goods normally for the government.
It is important to note that the drawee can only become liable for a bill after s/he accepts it. Acceptance can be done in 2 ways which are, general acceptance and qualified acceptance. A general acceptance means that the bill is accepted without any condition or order. A qualified acceptance is when a drawer orders for a certain condition to be met. A qualified acceptance can be of time, place, partial payment or place. Nowadays, bills of exchange are hardly in use because they have been replaced by paper currency, bank wires and debit/credit cards.