Financial and financing documents

The financial documents, bills of exchange and promissory notes are listed below. A short
description then follows:

a) Bill of exchange drawn in foreign currency and payable at sight

b) Bill of exchange drawn in sterling and payable at sight
c) Bill of exchange accepted payable at 30 days' sight
d) Promissory note
e) Inspection and sampling order
f) Delivery order
g) Warehouse receipt
h) Trust receipt.

Bills of exchange

The legal definition (Bills of Exchange Act 1882, Section 3) of a bill of exchange is an
unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by
the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on
demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of,
a specified person (payee), or to bearer. The words in brackets do not appear in the Act, but
have been inserted for clarity.

Bills of exchange are widely used in international trade, partly since they are convenient
vehicles for collecting payment from traders abroad. Finance may be arranged in a number of
ways using bills of exchange, both for the buyer (drawee) and for the seller (drawer). Bills of
exchange which have been dishonoured may be used in their own right as the basis for legal
action. After payment, the discharged bill of exchange is retained by the drawee as evidence of
payment, in other words it becomes a receipt for the money. It is the practice in some European
countries for banks to avail bills of exchange by adding the bank's name to the bill; this raises
the status of the document as the availing bank has guaranteed payment at maturity.

Promissory notes

Whilst not bills of exchange, these are largely subject to the same rules and are used for a
somewhat similar purpose, the settlement of indebtedness. Instead of being drawn like a bill of
exchange by the person expecting to be paid, they are made by the person who owes the
money, in favour of the beneficiary. A simple way of looking at a promissory note is to consider
it an IOU. When due, it is presented for payment by the holder, who may be the payee or
someone to whom the promissory note has been negotiated.

Inspection and sampling order

When banks are protecting consignment stocks for foreign exporters to, say, the UK, or if they
are lending to a UK importer against a pledge of goods, the goods are usually warehoused in
the bank's name pending sale to buyers. Prospective buyers frequently need to inspect and
sometimes sample the goods before buying them, and it is necessary to be able to authorise a
warehouse to permit this to take place. Assuming that the overseas seller or UK importer
authorises sampling and/or inspection, a bank may issue such an order on a warehouse and
hand it to the prospective buyer.

Delivery order

This is an order on a warehouse instructing it to deliver goods to the bearer or a party named in
the order. Banks issue such orders when goods stored in their name are to be delivered to a
buyer or are to be reshipped and have to leave a warehouse.

Warehouse receipt

This is a receipt for goods issued by a warehouse. The document is not negotiable and no rights
in the goods can be transferred under it. Delivery orders may be issued against the receipt for
the goods which relate to it.

Trust receipt

When a bank wishes to release documents of title, or the goods themselves, to a customer of
undoubted integrity, whilst still retaining its security rights in those goods and/or the proceeds of
their sale, it may obtain a completed trust receipt from its customer to whom a loan has been
made. This is an acknowledgement of the pledge of the goods to the bank and an undertaking
of the customer to take the documents as trustees for the bank and to:

a) arrange for goods to be warehoused in the bank's name, or

b) arrange for processing of the goods and their return to the warehouse in the bank's name, or

c) arrange for sale of the goods and to pay all sale proceeds without deduction to the bank
immediately on receipt or within a short, stated period of time.