Bill of exchange – Settlement for goods and services has been a major problem for business owners and merchants abroad, however, things have taken a twist with the advent of payment channels like the “Bill of exchange” in recent times.
What is Bill of exchange?
Bill of exchange exists as an agreement where one party who buys goods/service from another/supplier arranged to complete a payment/settlement in cash on a predetermined date, this transaction is usually remitted internationally via foreign trade.
This payment is usually completed through a correspondence bank at the supplier’s or beneficiary’s residence country.
A bill of exchange is an unconditional order signed by a drawer directing the drawee to pay certain amount to the payee on a predetermined date.
Features of Bill of exchange
- It’s made in writing
- It contains an order to effect payment/it’s an order not a request
- It’s unconditional
- Amount to be paid is clearly stated
- It usually contains a fixed date which payment should be made
- Usually signed by both the drawee and the drawer
- Amount usually paid on demand
- The beneficiary receives the amount strictly.
Types of Bill of exchange
Inland Bill: This can be referred to as opposite of foreign bill since it can only be paid in one country.
Foreign Bill: A bill that can be paid outside Nigeria, where there are particularly two types of foreign bills, namely,
- Export and
- Import bill
Trade Bill: This is a type of bill associated with trade strictly.
Supply Bill: Here’s is a bill that by whatever means is being withdrawn by the contractor hereafter supplier from a department of government institution.
Accommodation Bill: This is a Bill that’s sponsored and accepted with any string attached whatsoever.
Usance Bill: This is a bill which payment must be completed within a time frame specified.
Example of Bill of exchange
Say Frankon Holdings a motorcycle spare parts dealer in Nigeria purchased goods from a manufacturing company in China Zing Wang Ltd and is to be supplied for $50,000.
Zing Wang Ltd draws the Bill of exchange, hitherto the Bill of exchange states that Frankon Holdings will pay $50,000 to Zing Wang Ltd for auto spare parts supply in may be 90 days.
Frankon Holdings becomes the drawee and accepts such bill of exchange wherein the goods get shipped.
In the event of 90 days, Zing Wang Ltd will present the bill to Frankon Holdings for payment.
Parties to a Bill of exchange
A bill usually involves three parties as you will learn shortly below
The Drawer: The drawer here is a party who initiates the Bill to be paid on a specified date
The drawee: The drawee is the party who pays the sum stipulated by the bill.
The Payee: The payee is a party who received the sum payable then makes it available to the drawer. In subsequent terms both the payee and the drawer as often referred to as same.
Interpreting these parties from the above example, it stands that
- Zing Wang Ltd is the Drawer
- Frankong Holdings is the Drawee while
- A corresponding bank is the Payee.
What is promissory note?
Promissory note is a debt instrument which houses a promise in writing by one party to pay another party a certain sum of money usually either on demand or on a specified date in the future.
Essentially, promissory notes allow companies and individuals to get financing from sources order than the bank.
Difference between Bill of exchange and Promissory note
|Bill of exchange||Promissory note|
|A bill is transferable where one party is to pay another via a third party||Bank notes are a form of promissory note|
|A bill is rightly issued by a creditor with an order for a debtor to pay certain amount on a future date||Promissory note is however issued by the debtor where it stands a promise to pay a debt of certain amount on an arranged date|
Parties to Promissory note
The parties to promissory note include
- The maker/drawer: This is a party who makes or draws the promissory note, where a certain sum is promised to be paid subject to being specified in the note.
- Payee: The beneficiary of the promissory note is the payee here
- Drawee: Here is the party upon which the bill is drawn
|Terms/period of bill||This is the actual time between the date by which a bill is drawn and a date on which such bill is payable|
|Due date||This is a date in which the bill is due for payment|
|Days of grace||The three extra days added to the period of a bill are known as days of grace|
|Date of maturity||The date which arrives after adding the three days of grace to a period of the said bill|
|What discounting of bill?||This is encashment of a bill prior its date of maturity in full, the bank however deducts charges from such bill by implication|
|What is endorsement of bill?||This refers to the transfer of bill or promissory note to another party, however transferred on account of the settlement of debts and dues|
|What is a bill sent for collection||Bill sent for collection is that sent to the bank for collection with express instruction that such bill will be retained till the maturity date|