What Is a Bill of Exchange? - Definition & Sample

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  • 0:04 What Is a Bill of Exchange?
  • 1:02 Bill of Exchange vs. a Check
  • 2:08 Using a Bill of Exchange
  • 2:50 Bill of Exchange:…
  • 4:04 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Buyers and sellers of goods process payments in a variety of ways. One method is using a bill of exchange, or a written agreement to pay a certain amount on a certain date. In this lesson, we'll learn the basics of a bill of exchange.

What Is a Bill of Exchange?

Have you ever written a check for rent or groceries? Then you've used something very similar to a bill of exchange. A bill of exchange is a legally binding, written document that orders a certain party to pay a specific amount of money to a second party. Some bills of exchange may say that the money is due on a predetermined future date, or they may state that payment is due on demand.

It's used in the transaction of goods and services. The bill of exchange is signed by the party that owes money (the payer) and given to the party entitled to the money (the seller or payee), who can then use it to fulfill a contract for payment. However, the seller may also endorse the bill of exchange and transfer it to someone else, thereby passing the payment on to another party.

Note that when a bill of exchange is issued by a financial institution, it's often called a bank draft. When it's issued by an individual during a transaction, it's referred to as a trade draft.

Bill of Exchange vs. a Check

While checks and bills of exchange are not the same thing, they do have a lot in common, and understanding how a check works can help to grasp the concept of a bill of exchange. Like a bill of exchange, a check is signed by the payer and given to the payee during a transaction of goods or services. Additionally, both can be transferred by endorsing the document.

The main difference between these two documents is that a check is always written by the payer (the drawer) to the person owed (the payee), who then receives money from the payer's bank by cashing in the check. However, a bill of exchange does not have to be paid through a bank--the drawee may be any person or a financial institution. In the latter case, a bill of exchange would stipulate that the payee submit the bill of exchange to a third party (the payer's bank) for payment, in the case that the payer does not come through with payment.

Another important difference to note is that a bill of exchange cannot be voided or canceled in the same way that checks can be voided and canceled. In this way, bills of exchange may be considered the safer option.

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