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What Are the Various Types of Bills of Exchange?

Topics: Finance, Management

One of the more common ways to go through a financial business transaction is with a bill of exchange. 

A Bill of Exchange, also referred to as BOE, is an unconditional, written order by an entity (the drawer) to another (the drawee) to pay an amount, either right away or on a set date for payment of goods or services received. Once the payee receives, accepts, and signs the bill, it then becomes a post-dated check and a binding contract between the two parties.

The two parties typically involve two parties: a drawer—the person who has the bill drafted or written up, and a drawee—the person who is responsible for payment on the bill. When the draft becomes a bill, the drawer then becomes the “payee”, or the receiver of payment from the drawee or buyer.

A bill of exchange can either be paid immediately, which is known as a “sight bill” or on a fixed date, which is known as a “term bill.”

Before a bill of exchange is accepted and signed, it is referred to as a “draft”. All “drafts” are negotiable until signed. Only until “drafts” are signed do they become a bill of exchange and are put into order.

It’s clear that various types of bills of exchange can be confusing, and can vary depending on their purpose. Let's take a look at the various types of bills of exchange.

What Are the Various Types of Bills of Exchange?

Now that you have a better understanding of what a BOE is, here is a breakdown of the various types of bills of exchange.

Bills of Exchange: Period

Bills of exchange can be based on period as demand bills and term bills. 

Demand bills do not have a fixed date associated with them. They are payable at any time.

Term bills of exchange are payable after a certain amount of time or on a fixed date.

Bills of Exchange: Object

Bills of exchange are based on objects or purpose. There are trade bills and accommodation bills. 

Trade bills are typically drawn by the seller of goods and are accepted by the buyer.

Accommodation bills do not involve the sale or purchase of any goods and/ or services; rather they are agreements between two parties with the purpose of financial support.

Bills of Exchange: Classification

Bills of exchange can also be based on classification. Bills of exchange can be classified as inland bills and foreign bills, and often involve international trade. 

Inland bills are drawn between two parties that are located or reside in the same country and thus are made payable in the same country.

Foreign bills are drawn and involve parties in two different countries. For example, an international bill might involve a seller located in the United States, where the bill is drawn, and a buyer in England. In this example, the bill is made payable in England, the buyer or drawee’s location.

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What Content is Included in a Bill of Exchange?

The content in a bill of exchange can vary depending on the basis or purpose, however, most bills of exchange include information and material regarding the following:

Date: The “draw” date of the bill. This date is important as it determines the maturity date of the bill.

Term: This is the period of time that the bill is in order.

Amount: The amount of the bill is listed in a numerical format as well as written out within the body of the bill.

Stamp: The stamp is the value of the bill, which depends on the amount of the bill.

Parties: There can be up to three parties in a bill of the exchange agreement. However, most bills involve a drawer and drawee. The names and addresses of each party are listed in a bill.

How is a Bill of Exchange Different From a Loan?

One common question about the various types of bills of exchange is how they are different from a loan. 

The main difference is that not all bills of exchange involve borrowing funds. As explained above, some bills can involve the agreement to pay for certain goods or services.

Understanding the various types of bills of exchange can be somewhat confusing. However, it’s important to understand the differences so that you know the basis of each bill and you can determine which type of bill of exchange best fits your situation.

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