Bill of Exchange

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What is Bill of Exchange?

A bill of exchange refers to a written interest that does not bear any interest. A bill of exchange is generally used in international trade and aims at binding one party to pay a fixed amount of money to another party at a predestined future date. As explained by Investopedia, bills of exchange are just like checks and promissory notes. This implies that they can be drawn by banks or individuals and are also commonly transferable through the way of endorsements. In case of being endorsed by a bank, they can be called as bank drafts and in case of being issued by individuals, they are called as trade drafts.

Features/Characteristics of the Bill of Exchange

The main features or characteristics carried by a bill of exchange include:

  • A bill of exchange needs to be in writing.
  • It should essentially include an order to pay.
  • It is required for the order to pay to be unrestricted. If it is, in any case, subject to the occurrence of some events, it will not be considered as a bill of exchange.
  • It is required to be duly signed and stamped by the drawer.
  • The parties to the bill (the drawer, the drawee, and the payee) should be certain and definite individuals.
  • There should be a definite amount to be paid.
  • The payment needs to be paid in cash than in kind.
  • The bill can be either on demand or after a specific time period.
  • The bill can be payable either to the bearer as well as to the order of payee.

Functions of Bill of Exchange

The main functions performed by a bill of exchange include:

  • A bill of exchange provides the granting of trade credit in a lawful format by allowing payments on agreed prospective dates.
  • Facilitates formal evidence of the claim for payment from a seller to a buyer.
  • Facilitates the seller with access to finance by allowing them to transfer their debts to a bank or financer by simply endorsing the bill of exchange to that bank or financer.
  • Allows the financer or the banker to retain a convincing legal claim on the buyer as well as the seller.

Permits a seller to protect their access to the legal system in case of problems, besides providing easier access to that legal system.

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