What is a Bill of Exchange

Now rarely used in international trade, bills of exchange are promises to pay but accepted bills of exchange offer no guarantee of payment on due dates.

Buying by Bill of Exchange

A promise to pay (promissory note) principally in exchange for goods and once widely used in international trade is a bill of exchange. Today they have largely been replaced by letters of credit.

The bill will state the amount payable, the currency in which it is to be paid and the payment date. If the bill is to be paid "at sight" that will mean the bill is to be paid on the day of acceptance.

Accompanying Documents

A bill of exchange will be accompanied by documents relating to the transaction, including the original bill of lading, which is the document of title to enable collection of goods. Bills of exchange are normally presented for acceptance by the buyer's bank.

Bills of exchange are transferable, meaning that once accepted the bill and therefore the debt that the bill represents can be sold on (i.e. discounted) by the supplier; usually to a bank or other finance provider.

Security of Bills of Exchange

Although your bank acts as the supplier bank's agent for the purpose of presenting a bill of exchange for acceptance, it is not required to guarantee payment on the due date.

Irrevocable letters of credit do guarantee payment by the bank on the due date. The greater security this offers explains why bills of exchange have fallen out of favour for international trade settlements in recent years.

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