This article will briefly define Bill of Exchange and Promissory Note and will highlight the key differences between them. A promissory note is that monetary instrument wherein the maker, in writing, promises to pay at a specified date or on demand a certain sum of money payable to the payee. They are generally used in loan transactions wherein one of the parties requires borrowing funds or credit. They thus become legally binding and are considered proof of the debt between the two parties.
Loan contracts
It is a good idea to check with the relevant authorities or institutions for any specific requirements or limitations. Understanding the distinction between a bill of exchange and a promissory note is not just a matter of academic interest but a practical necessity for anyone in the field of business and finance. Whether you are a business owner considering a Business Loan or a finance professional, a thorough understanding of these instruments can aid in better financial decision-making and management.
Applications in Business and Finance
In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid insolvency. In the United States, a promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes called mortgage notes are used extensively in combination with mortgages in the financing of real estate transactions. One prominent example is the Fannie Mae model standard form contract Multistate Fixed-Rate Note 3200, which is publicly available.39 Promissory notes, or commercial papers, are also issued to provide capital to businesses. However, promissory notes act as a source of finance to the company’s creditors.
Bills of exchange help facilitate the process of international trade by stipulating payment from one party to another at a specified date. They function similarly to a check and though not a contract, can be used to fulfill the terms of a contract. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for payment.
A bill of exchange involves the drawer (who issues the bill), the drawee (who is directed to pay), and the payee (who will receive the payment). This transfer is called endorsement, and it helps reduce the risk for both parties if payment is not made. 9) In the Bill of Exchange, you can send money to anyone but in the Promissory Note, you cannot send money to an unknown beneficiary. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any.
The exporter can then either wait for 90 days to receive payment or discount the bill at a bank for immediate cash. In common speech, other terms, such as “loan”, “loan agreement”, and “loan contract” may be used interchangeably with “promissory note”. The term “loan contract” is often used to describe a contract that is lengthy and detailed. Bills of exchange are more commonly used in trade transactions to facilitate credit and ensure payment between parties. The use of cheques and bills of exchange may be subject to certain rules or restrictions set by banks, financial institutions, or local regulations.
- A bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within a given period of time.
- Unlike a check, a bill of exchange is a written document outlining a debtor’s indebtedness to a creditor.
- Promissory note is a written promise to pay money issued by an individual or corporate body.
- In a business scenario, Supplier A (drawer) supplies goods to Buyer B (drawee).
Promissory note is a written promise to pay money issued by an individual or corporate body. It may be in the form of a letter or a writing and the payments can be done on a recurring or one off basis. Promissory note is generally used to secure a loan, it also gives a time period for the borrower to repay the loan amount with interest.
Who will accept the bill of exchange?
A bill of exchange must be accepted by the payee.