Difference between Bills of Exchange and Promissory Note
Introduction
Bills of exchange and promissory notes are important financial instruments that help individuals and businesses to carry out commercial transactions. Although both of these types of securities have similarities, there are notable differences between them. In this article, we will examine the difference between bills of exchange and promissory notes and why businesses and individuals should understand what distinguishes these two financial instruments.
Bills of Exchange
A bill of exchange is a written order used in international trade that is used to transfer funds from one party to another. This financial instrument is typically signed by the drawer and is payable to a third party, known as the payee. Bills of exchange are usually used as an alternative to bank loans and are commonly utilized in trade finance.
One of the main differences between a bill of exchange and a promissory note is that the former requires at least three parties, whereas the latter involves only two parties. The parties involved in a bill of exchange include the drawer, the payee, and the drawee. The drawer is the party that initiates the bill, the drawee is the party that is responsible for paying the bill, and the payee is the party that receives payment.
Promissory Notes
A promissory note is a legal instrument that is used to secure a loan, and it requires only two parties. The note is a promise to pay a specific amount of money to a lender or creditor at a specific time. The borrower is the party that signs the promissory note and promises to repay the funds borrowed, with interest, to the lender.
Unlike bills of exchange, promissory notes do not require the involvement of a third party. Additionally, promissory notes are commonly used in personal financing between individuals or small businesses instead of international trade.
Conclusion
In conclusion, bills of exchange and promissory notes are securities used in commercial transactions but are different in their structure, requirements, and usage. It is important for businesses and individuals to understand the difference between these two instruments to make informed financial decisions. Knowing when to use which financial instrument will also help in managing financial liabilities and obligations.
Table difference between bills of exchange and promissory note
| Feature | Bills of Exchange | Promissory Note |
|---|---|---|
| Parties involved | 3 parties – drawer, drawee, payee | 2 parties – maker, payee |
| Unconditional promise | No | Yes |
| Time of payment | Usually after a certain period of time | On demand or at a fixed date |
| Usage | Used in commercial transactions between businesses | Used in personal transactions or to obtain loans |
| Endorsement | Possible | Not possible |
| Acceptance | Required | Not required |