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A Supply Bill is withdrawn by the supplier or contractor for supplying specified goods.

Demand Bill:

It is a bill of exchange payable upon demand without a fixed payment date.

Usuance Bill:

It is a time-bound bill of exchange in export that must be paid within a specified period.

Foreign Bill:

This bill of exchange can be paid outside the country where it was issued and is typically used for international transactions.

Parties to a Bill of Exchange

A bill of exchange usually involves three essential parties who play different roles in the transaction:

Drawer

The drawer is the person who creates and signs the bill, representing the creditor or the party entitled to receive payment.

Drawee

The drawee is the individual or entity upon whom the bill is drawn, typically the debtor responsible for making the payment.

Payee

The payee is the designated recipient of the payment mentioned in the bill. It can be the drawer themselves or a third party entitled to receive the funds.

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.

Advantages of a bill of exchange

Legal evidence

A bill of exchange in export serves as a legally binding document, providing strong evidence of the debt owed. In case of any dispute or non-payment, the drawer can utilize the bill as proof to initiate legal action and recover the amount due.

Fixed amount and date

The clear specification of the amount and due date on a bill of exchange ensures transparency and certainty for both parties involved. This eliminates any ambiguity or confusion regarding the payment obligations and facilitates proper financial planning.

Discounting facility

One significant advantage of a bill of exchange is the discounting option. If the drawer or holder requires immediate funds before the maturity date, they can sell the bill to a bank or financial institution at a discounted rate. This allows for early cash realization and improves cash flow.

Negotiable

A bill of exchange, particularly when payable to the bearer, offers negotiability. This means that it can be transferred from one person to another, settling debts or facilitating trade transactions. The negotiability of bills of exchange enhances their liquidity and flexibility.

Full credit period for drawee

The drawee, who is obligated to make the payment on the due date, benefits from the full credit period granted by the bill of exchange. They are not compelled to make the payment earlier than the specified date, allowing them to manage their cash flow more effectively and utilise the funds until the maturity of the bill.

Disadvantages of a bill of exchange

Limited suitability for long-term services

Bills of exchange are majorly used for short-term transactions and may not be an ideal option for long-term financial arrangements.

Drawee’s responsibility for timely payment

The drawee is obligated to pay the amount specified in the bill by the due date, which can put pressure on their financial resources and cash flow management.

Unsuitability for banking services

Bills of exchange are generally considered unsuitable for various banking services due to their inherent complexities and limited flexibility compared to other financial instruments.

Additional burden with bill discounting

If a bill of exchange is discounted, the drawee may incur additional costs or fees, adding to their financial burden.

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.

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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.

When is interest included in a Bill of Exchange?

Interest is typically not included in a bill of exchange, as it functions more like a post-dated check. However, if the bill is not paid by a specified date, it may start accruing interest, which must be clearly mentioned on the instrument.

What is a bank bill of exchange?

A bank bill of exchange, or banker’s acceptance (BA), is a secure form of payment guaranteed by a bank. It functions like a post-dated check and is commonly used by businesses for large transactions. BAs can also serve as short-term debt instruments traded at a discount in money markets.

What is the transferability of a Bill of Exchange?

The transferability of a Bill of Exchange refers to the ability to transfer the rights and obligations stated in the bill from one party to another. When a bill is transferable, the payee has the option to endorse the back of the document, allowing them to transfer the bill to a third party.

What is the first and second bill of exchange?

The first bill of exchange refers to the Second of Exchange (First Unpaid) in the context of a letter of credit. It is a draft drawn on the drawee bank in order to ensure that at least one draft reaches the drawee when dispatched separately. This practice is similar to the issuance of multiple original bills of lading. On the other hand, in a documentary collection, typically only one draft, known as a sola bill, is issued, which is drawn on the importer.

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.
6. https://byjus.com/commerce/class-11-accountancy-chapter-8-bill-of-exchange/
7. https://www.vedantu.com/commerce/bills-of-exchange
8. https://www.financestrategists.com/accounting/bill-of-exchange/
9. https://blog.ipleaders.in/all-you-need-to-know-about-a-bill-of-exchange/#Parties_to_a_bill_of_exchange
10. https://www.investopedia.com/terms/b/billofexchange.asp
11. https://www.investopedia.com/terms/b/bankersacceptance.asp
12. http://www.hichem.com/info_trade/info/bx.html
13. https://www.accountingtools.com/articles/what-is-a-bill-of-exchange.html

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