Bills of Exchange versus Promissory Notes – What’s the Difference?
When exchanging goods and services overseas, you’ll often come across important trade terms such as bills of exchange, prom notes and trade bills. We’ve quickly summarised the three terms, and key differences, and have got a more extensive shipping and transport guide here if you’re shipping overseas.
What is a trade bill?
We sometimes see a trade bill referred to as a bill of exchange, which is an agreement to pay funds at a specific time in the future. It is usually used by a buyer to purchase product from the supplier, with payment guaranteed at a later time. They are in effect receiving ‘credit’ from the supplier.
A bill of exchange is usually referred to as being issued and/or endorsed (accepted) by non-bank entities. An example will be where there is an agreement to pay for a product in the future and a bill of exchange is drawn on and accepted by a trader; showing a commitment of payment for goods at a later date. Payment can be received earlier if a third part financier discounts the future amount to be provided.
What is a ‘Bill Of Exchange’
At its core, a bill of exchange does not bear interest and is a written order, which is used in international trade to commit one entity to pay a fixed sum of money to another party at a date in the future, which is set out in the documentation. Many compare these instruments to promissory notes and cheques, as they are written or drawn by individuals and can be transferable by endorsements.
How does a bill of exchange and promissory note differ?
A bill of exchange is transferable; this means that one party can be obligated to pay another party; who was not involved in the creation of the instrument. They can also be seen as bank drafts if banks created them. Conversely, if they are issued by individuals, they can be seen as trade drafts. A bill of exchange is usually issued by one party and endorsed by another. As it has been endorsed or there is an agreement to pay; there is little risk in non payment.
Read our Bill Discounting guide here.