A bill of exchange is a specialized type of international draft used to expedite foreign money payments in many types of international transactions. In addition, a draft is commonly used in the U.S. while a bill of exchange is primarily used outside the U.S.
A negotiable instrument is a signed writing, containing an unconditional promise or order to pay a fixed sum of money, to order or bearer, on demand at a definite time. Examples of negotiable instruments include promissory includes which are two party instruments and drafts which are three party instruments.
Thus, a negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time.
Example of a Bill of Exchange Transaction
After shipping the goods, the documents for import along with the bill of exchange are submitted to the exporter’s bank. Then, the exporter’s bank then send it to the foreign buyer through buyer’s bank. The said bill of exchange draws in duplicate as per the specified format. The bill of exchange contains the reference details of shipment, amount of invoice to be receivable from overseas buyer, the time of payment to be effected, bank details etc.
A draft is the signed order of the drawer, given to a drawee who in possession of money to which the drawer is entitled, to pay a sum of money to a third party, the payee, on demand or at a definite time. A check is a example of a draft, which is drawn on a bank and payable on demand. The three parties include the drawer, the drawee bank and the payee.
A documentary draft is used to expire payment in a documentary sale.
These negotiable instruments can serve two purposes:
- They act as a substitute for money
- They act as a financing or credit service