Bill of exchange

What Is a Bill of Exchange?

A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to
another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes—they can be
drawn by individuals or banks and are generally transferable by endorsements. Bills of exchange are sometimes called drafts, but
that term usually applies to domestic transactions only.

History
The bill of exchange originated as a method of settling accounts by Arab merchants. And the bill in its present form attained wide
use during the 13th century among the Lombards of northern Italy, who carried on considerable foreign commerce. Because
merchants (the buyers) usually retained their assets in banks in a number of trading cities, a shipper of goods (the seller) could
obtain immediate payment from a banker by presenting a bill of exchange signed by the buyer.

How a Bill of Exchange Works

A bill of exchange transaction can involve up to three parties. The drawee is the party that pays the sum specified by the bill of
exchange. The payee is the one who receives that sum. The drawer is the party that obliges the drawee to pay the payee. The
drawer and the payee are the same entity unless the drawer transfers the bill of exchange to a third-party payee. While a bill of
exchange is not a contract itself, the involved parties can use it to fulfill the terms of a contract. It can specify that payment is due
on demand or at a specified future date. It's often extended with credit terms, such as 90 days. As well, a bill of exchange must be
accepted by the drawee to be valid.

Bills of exchange are useful in international trade because they help buyers and sellers deal with the risks associated with exchange
rate fluctuations and differences in legal jurisdictions.

Types of Bills of Exchange:

Bills of exchange are categorized as follows:

Inland Bill: An inland bill is a bill that is made payable in the home country only.
Foreign Bill: The bill made payable in a foreign country is called Foreign Bill.
Usance Bill: This bill covers the period within which the payment is to be made.
Clean Bill: This bill doesn’t include any documents as opposed to the documentary bill. Hence, the interest is higher than the other
bills.
Demand bill: This bill is payable on demand. It has no fixed period of payment.
Accommodation Bill: The bill which is sponsored to help another person in need, drawn and accepted without any condition is
known as an accommodation bill.
Documentary bill: They are very popular in trade circles. These bills are accompanied by a bill of lading, air consignment note,
truck/lorry receipts, railway receipts.

Advantage of Bill of exchange:

1) It is a legal document. If the drawee fails to make payment in due time, the drawer can recover the amount legally.
2)The terms of bills of exchange are certain and can’t be altered.
3)Adequate time for payment: Importer buying goods and services gets sufficient time limit to pay for the purchase by negotiating
in bills of exchange.
4)Clear terms and conditions: The bills of exchange are signed by the acceptor only after accepting and reading the clear terms and
conditions of the bills of exchange.
5) Easy transfer: The bills of exchange can be easily transferred to the third party. By endorsement of the bill, the liability to pay can
be transferred to the third party.
6)Mutual accommodation: Such bills are drawn to meet the financial need of others. In this case, the bill is issued to mutually
accommodate the other party.

So, now you know.