What is Bill of Exchange & its Advantages


According to Indian Negotiable Instrument Act, 1881

” A bill of Exchange is an instrument in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”

Characteristics of Bills of Exchange

On the basis of the above definition following are the main characteristics of bill of exchange :-

  1. A bill of exchange must be in writing.
  2. It must contain an order to make payment.
  3. The order  must be unconditional.
  4. The amount of bill of exchange must be definite.
  5. The date of payment must be a fixed one.
  6. It must be signed by the maker of the bill.
  7. It must be signed by the acceptor.
  8. The amount  mentioned in the bill is payable either on demand or on the expiry of a fixed period.
  9. The amount is payable either  to the bearer of the bill or to a specified person or to his order.
  10. It bears stamps according to its amount or is drafted on a stamped paper of the court.

Parties to a Bill of Exchange

There are three parties to a bill of exchange:

1. Drawer

He is the seller or creditor entitled to receive money from someone. He writes or draws  the bill and is known as drawer. The bill of exchange is signed by the drawer of the bill.

2. Drawee or Acceptor

He is the purchaser or the debtor on whom the bill is drawn and who is liable to pay the amount mentioned in the bill.

He accepts to pay the amount by writing the word ” Accepted ” on the bill and then signs it. A bill is called a draft before it is accepted.

3. Payee

The person to whom the payment is to be made is called payee.The drawer himself or a third party may be the payee of the bill.

The drawer will be the payee of the bill, if he retains the bill till the date of maturity and receives the payment. The bank may also be the payee of the bill if the bills is discounted from the bank.

In case the bill is endorsed by the drawer to a third party, the third party known as endorse will be the payee of the bill. As such, the drawer himself or the bank or the endorse  may be the payee of the bill.

Advantages of Bills of Exchange

1. Helpful in the purchase and sale of goods on credit

A bill of exchange serves as a written evidence of debt. It is a proof that the purchaser of goods owes the amount written in it. As such the goods can be sold on credit without difficulty.

2. Legal Document

It is a valid document in the eyes of law. If the drawee fails to make its payment, it would be easier to recover the amount legally in comparison to a verbal promise.

3. Discounting Facility

The holder of a bill need not wait till the due date of the bill to receive as he can easily turn it into cash by discounting it from the bank before its due date.

4. Endorsement possible

A bill of exchange can be easily transferred from one person to another in settlement of debts as it is a negotiable instrument.

5. Relief from sending reminders

The seller need not approach the purchaser time and again to demand the payment because the date of payment is fixed and written on the bill of exchange.

6. Helpful in planning cash operations

The seller knows the time when he would receive the money and, as such, he can plan his cash operations accordingly.

7. Convenient means of making foreign payment

Bills of Exchange enable the firms to receive and make payments in case of foreign trade also. It avoids the trouble and risk of transmitting the foreign currency from one place to another.

8. Saving of money in circulation

A bill of exchange performs the functions of money.

By making payment through bills, the money in circulation will not be used and hence results in the saving of wear and tear in the currency.

9. Convenience for the purchaser

By accepting a bill a purchaser gets time to make the payments. As such he can purchase more goods and increase his business. Moreover, he cannot be called upon to make the payment at a date earlier than the one fixed in the bill.

Due to these advantages, bills of exchange have become extremely popular device for the grant of credit in business.

Promissory Note

Sometimes the purchaser of the goods or  debtor himself writes a note, signs  it and gives it to the seller of the goods. It is called a Promissory Note.

According to Indian Negotiable Instrument Act, ” A Promissory Note is an instrument in writing the containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person”.

Features :-

1. It must be in writing.

2. There must be a promise to pay a certain sum of money in it. For example, ” I owe rupees ten thousand ” is not a promissory note because it is merely  an acknowledgement of debt and there is no promise to pay.

3. The promise to make payment must be unconditional.

4. The amount to be paid must be specified.

5. It must be signed by the maker or promisor.

6. The name of the payee must be mentioned in it.

7. The promissory note cannot be made payable to bearer.

8. It must be stamped according to its value.

Parties to a Promissory Note

There are two parties to a promissory note:

1. Maker

He is the person who writes a promissory note.

2. Payee

He is the person who is entitled to get the payment.

There is no acceptor in case of a promissory note because the maker himself is liable to pay the amount.

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