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What is a Bill of Exchange in export business: Understand its types and uses

A Bill of Exchange is a negotiable instrument made by the seller/exporter addressed to the buyer/importer. In this guide, learn about the format, process to obtain it, types and uses of Bill of Exchange in international trade.

In international trade, documentation is an important step that ensures smooth export of goods and seamless payments. With every shipment that is exported from India, a few export documents are required, which is usually based on origin and destination countries, shipping mode and the products being exported. Among the list of documents, a Bill of Exchange is one such important export document that works as a negotiable instrument.

What is a Bill of Exchange?

A Bill of Exchange is an important document in export process that contains reference details of an export shipment like amount of invoice from the buyer, time of payment, bank details, etc. It is used in international shipping as a negotiable instrument. When a Bill of Exchange is issued by a bank, it is referred to as a bank draft. If it is issued by an individual, then it is referred to as a trade draft¹. For instance, when person ‘A’ exports goods to person ‘B’ on credit of INR 10,000 for three months. To ensure payment on the due date, ‘A’ draws a Bill of Exchange to ‘B’ for INR 10,000 payable after the time period. Before it is accepted by ‘B’, it will be called a draft. Once ‘B’ writes the word ‘accepted’ with a signature, the draft becomes a Bill of Exchange.

What are the different types of bills of exchange?

Some of the common types of Bills of Exchange are²:

Trade Bill:

Here, the Bill of Exchange is used for a trade transaction and is drawn by the seller and accepted by the buyer.

Accommodation Bill:

An Accommodation Bill of Exchange is used as an agreement between two parties to give financial support to each other.

Documentary Bill:

Here, the Bill of Exchange confirms that the relevant documents that are required in the said transaction between the seller and the buyer are genuine.

Inland Bill:

An Inland Bill is used when the amount is payable or drawn only in the specified jurisdiction and nowhere else.

Clean Bill:

This bill does not have any accompanying shipping documents.

Supply Bill:

A Supply Bill is withdrawn by the supplier or contractor for supplying specified goods.

Format of a Bill of Exchange

Some of the details that are covered in a Bill of Exchange are³:
• Name of the authorized person who writes the bill
• Name of the recipient
• Date on which the payment is to be made
• Signature of the person who makes the bill

What are the uses of a Bill of Exchange in export?

• The constant fluctuations in the rate of exchange can adversely affect long-term trading arrangements. A Bill of Exchange gives assurance to exporters to receive a fixed price.
• A Bill of Exchange helps meet financial needs of the parties.
• It helps to enhance the per capita income of the country.

How can an exporter create a Bill of Exchange?

A Bill of Exchange usually includes three parties –
Drawee: The party that pays the sum
Payee: The party who receives the sum
Drawer: The one that obliges the drawee to pay the payee

Any exporter who is entitled to receive money from an importer or a buyer can draw a Bill of Exchange. Considering the above example where an export transaction took place between A and B, A will be the drawer of the Bill of Exchange and B is the drawee.

Once you have obtained a Bill of Exchange and other required documents for your export business, you can sell internationally from India using e-commerce.

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Frequently Asked Questions

What are the advantages of a Bill of Exchange?

Following are some of the advantages of a Bill of Exchange:
• The constant fluctuations in the rate of exchange can adversely affect long-term trading arrangements. A Bill of Exchange gives assurance to exporters to receive a fixed price.
• A Bill of Exchange helps meet financial needs of the parties.
• It helps to enhance the per capita income of the country

What is the difference between a Bill of Exchange and a bill of lading?

A Bill of Exchange is for financing a transaction between two parties, whereas a Bill of Lading is a shipping document that a freight forwarder or a shipping carrier issues to a cargo owner.

Is a cheque a Bill of Exchange?

A cheque can be considered as a type of Bill of Exchange.

What is the difference between a Bill of Exchange and a promissory note?

A Bill of Exchange is an order from the creditor to the debtor to pay a specified amount. On the other hand, a promissory note is an instrument containing an unconditional undertaking signed by the maker.

What does ‘Discounting the Bill of Exchange’ mean?

Discounting of the Bill of Exchange is when the bank pays the person beforehand at less than face value and receives the payment.

What do you mean by Bill of Exchange after sight?

This type of Bill of Exchange must be paid within a particular number of days after the person has been given to receive it.

Published on July 21, 2022.

Sources:
1. https://www.researchgate.net/publication/305926602_The_bill_of_exchange_as_a_means_of_payment_and_security
2. https://ncert.nic.in/textbook/pdf/keac108.pdf
3. https://nios.ac.in/media/documents/SrSec320NEW/320_Accountancy_Eng/320_Accountancy_Eng_Lesson11.pdf
4. https://howtoexportimport.com/The-role-of-bill-of-exchange-in-export-business-87.aspx
5. https://www.investopedia.com/terms/b/billofexchange.asp#:~:text=A%20bill%20of%20exchange%20is%20used%20in%20international%20trade%20to,the%20rate%20of%20accrued%20interest.

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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