Types of Bills of Exchange

Types of Bills of Exchange

A bill of exchange is a written order used primarily in international trade to instruct a drawer's bank to pay a specific amount of money to the bearer. There are several types of bills of exchange, which are classified based on the parties involved, the payment terms, and the method of acceptance.

1. Inland Bill

• A bill of exchange used for domestic transactions within a country
• Drawn on a bank or a merchant in the same country
• Typically used for transactions between businesses or individuals within a country

2. Foreign Bill

• A bill of exchange used for international transactions
• Drawn on a bank or a merchant in a foreign country
• Typically used for transactions between businesses or individuals across different countries

3. Documentary Bill

• A bill of exchange that requires the presentation of documents, such as commercial invoices, bills of lading, and insurance certificates, to receive payment
• Used to ensure that the buyer receives the goods and the seller receives payment

4. Clean Bill

• A bill of exchange that does not require the presentation of documents
• Used when the buyer and seller have a established a relationship and trust each other

5. Sight Bill

• A bill of exchange that is payable on demand or at sight
• The payment is made immediately when the bill is presented to the bank

6. Usance Bill

• A bill of exchange that is payable at a specified date in the future, usually after a certain period of time (e.g., 30, 60, or 90 days)
• The payment is made on the specified date, not on demand or at sight

7. Accommodation Bill

• A bill of exchange that is used to raise short-term finance or to provide credit to the buyer
• The bill is not based on a genuine trade transaction, but rather on a financial arrangement between the parties involved

Types of Bills of Exchange

• A bill of exchange is a written order used primarily in international trade to instruct a drawer's bank to pay a specific amount of money to the bearer.

Classification of Bills

• Classified based on parties involved, payment terms, and method of acceptance.

Inland Bill

• Used for domestic transactions within a country.
• Drawn on a bank or a merchant in the same country.
• Used for transactions between businesses or individuals within a country.

Foreign Bill

• Used for international transactions.
• Drawn on a bank or a merchant in a foreign country.
• Used for transactions between businesses or individuals across different countries.

Documentary Bill

• Requires the presentation of documents (e.g. commercial invoices, bills of lading, insurance certificates) to receive payment.
• Ensures the buyer receives goods and the seller receives payment.

Clean Bill

• Does not require the presentation of documents.
• Used when buyer and seller have an established relationship and trust each other.

Sight Bill

• Payable on demand or at sight.
• Payment is made immediately when the bill is presented to the bank.

Usance Bill

• Payable at a specified date in the future (e.g. 30, 60, or 90 days).
• Payment is made on the specified date, not on demand or at sight.

Accommodation Bill

• Used to raise short-term finance or provide credit to the buyer.
• Not based on a genuine trade transaction, but rather on a financial arrangement between parties.

Drafting a Bill of Exchange

Essential Elements

• A bill of exchange must include the amount of money to be paid, the drawer (creditor), drawee (debtor), payee (party to receive payment), date and place of payment, and an unconditional order to pay.

Formal Requirements

• A bill of exchange must be in writing and signed by the drawer.
• It must contain an unconditional order to pay a specific amount of money.
• The bill must be addressed to a named drawee.
• It must specify the time and place of payment.

Types of Bills

• A Sight Bill is a bill payable on demand, without any condition or stipulation.
• A Term Bill is a bill payable at a fixed or determinable future time.
• A Documentary Bill is a bill accompanied by documents of title to goods, such as a bill of lading or warehouse receipt.

Capacity of Parties

• The drawer, drawee, and payee must have the legal capacity to enter into a contract.
• Minors and people of unsound mind cannot be parties to a bill of exchange.

Ambiguity and Uncertainty

• If a bill is ambiguous or uncertain, the drawee can reject it.
• The drawer is responsible for any ambiguity or uncertainty in the bill.