The Difference Between Bill of Exchange and Promissory Note
Introduction
When it comes to financial transactions, bills of exchange and promissory notes are two commonly used instruments. Despite their similarities, however, these two financial documents have a few key differences. In this article, we’ll explore the differences between bills of exchange and promissory notes.
What Is a Bill of Exchange?
A bill of exchange is a written contract that obligates one party to pay a fixed amount of money to another party at a specific time in the future. The document is typically used in international trade transactions, where the buyer and seller are based in different countries and there are concerns around currency conversion rates and reliability of payment.
One of the key features of a bill of exchange is that it is “negotiable,” meaning that it can be transferred from one person to another by endorsement. This can be useful in cases where a seller wants to use the bill of exchange as collateral for a loan or other financial transaction.
What Is a Promissory Note?
A promissory note is another type of written contract that obligates one party to pay a fixed amount of money to another party at a specific time in the future. Unlike a bill of exchange, however, promissory notes are typically used in domestic transactions, where both the buyer and seller are located in the same country and there are fewer currency conversion concerns.
Another key difference between bills of exchange and promissory notes is that promissory notes are typically “non-negotiable.” This means that the document cannot be transferred to another person by endorsement, making it less flexible than a bill of exchange.
Conclusion
While bills of exchange and promissory notes are both common financial instruments used in transactions where one party owes money to another, the key differences between them lie in their negotiability and intended use. Bills of exchange tend to be more commonly used in international trade transactions, while promissory notes are more commonly used in domestic transactions. Understanding the difference between these two documents can help you make informed decisions around your financial transactions.
Table difference between bill of exchange and promissory note
| Bill of Exchange | Promissory Note |
|---|---|
| A written order to pay a certain amount of money to a specific person or entity at a specific time in the future. | A written promise to pay a certain amount of money to a specific person or entity at a specific time in the future. |
| It involves three parties – the drawer, the drawee, and the payee. | It involves two parties – the maker and the payee. |
| The drawer instructs the drawee to pay the amount specified to the payee. | The maker promises to pay the amount specified to the payee. |
| It is primarily used in commercial transactions between parties who do not have a close relationship or credit history with each other. | It is primarily used in financing transactions, such as loans or mortgages, between parties who have a close relationship or credit history with each other. |
| The drawee may accept or refuse to pay the bill of exchange. | The maker is obligated to pay the promissory note unless specified conditions are not met. |
| It can be negotiable and can be transferred to a third party through endorsement. | It can be negotiable and can be transferred to a third party through endorsement. |