A bill of exchange turns a trade debt into a signed, transferable claim, which courts treat as close to cash
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A bill of exchange is the seller's written order to the buyer to pay. A promissory note is the buyer's own written promise to pay. Both can be sold on before they fall due, and UK law now recognizes both in electronic form.
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01 · Order and promise
A bill is an order to pay and a note is a promise to pay, and the law lets both change hands
A is a written order from one person to another to pay money. The UK Bills of Exchange Act 1882, section 3 defines it as "an unconditional order in writing, addressed by one person to another". The person who writes and signs the order is the , usually the seller. The person told to pay is the , usually the buyer.
The bill must say when to pay. Under the same section, it is payable on demand or at a fixed or determinable future time, and it is for a sum certain in money. In trade, people usually call a bill a draft, as the US International Trade Administration's Trade Finance Guide (July 2022) notes.
A works the other way round. It is a written promise to pay, made by the buyer itself. Section 83 of the Act calls it "an unconditional promise in writing". The person who signs the promise is the . The person to be paid is the payee.
US law draws the same line. Under the Uniform Commercial Code, section 3-104, as enacted in North Carolina, an instrument is a note if it is a promise and a draft if it is an order. Both are negotiable instruments: unconditional promises or orders to pay a fixed amount of money. Our bill of exchange and promissory note card puts both on one page.
02 · Acceptance and negotiation
Acceptance binds the buyer to pay, and indorsement moves the claim to a new holder
A bill binds the buyer once the buyer accepts it. is the drawee's agreement to the drawer's order, under section 17 of the Act. The acceptance must be written on the bill and signed by the drawee.
After that, the buyer is called the acceptor. It promises to pay according to the terms of its acceptance, under section 54. A promissory note skips this step, because the maker has already promised to pay.
The right to be paid can then change hands. A bill payable to a named person's order moves by , the holder's signature on the bill, completed by handing the bill over, under section 31. A bill payable to bearer moves by handing it over alone. The holder is the payee or indorsee who has the bill, or the bearer, under section 2.
Figure 1 · Interactive
The life of a trade draft and a promissory note
Tap an instrument to follow it from issue to payment at maturity.
Sources: UK Bills of Exchange Act 1882, sections 2, 3, 17, 31, 54 and 83, legislation.gov.uk; ICC, URC 522; ICC, Uniform Rules for Forfaiting. Step order is the Research Desk's reading of the Act.
03 · In trade
Drafts sit at the center of documentary collections and forfaiting
In a , banks pass the shipping documents to the buyer against payment or acceptance. Collections use a bill of exchange, commonly known as a draft, the ITA guide explains. The ICC's collection rules, , list bills of exchange and promissory notes as , according to the ICC rules text.
A is paid when it is presented. A is paid at a later date. Under , the exporter gives the importer time to pay by using a time draft, the ITA says. Our guide to documentary collections walks through each step.
Courts give accepted bills real weight. In GMAC Commercial Finance v Mint Apparel, decided by the High Court of England and Wales on October 7, 2010, the finance provider paid the exporter 80% of its invoice and drew a bill of exchange on the importer for 100% of the invoice value. GMAC then claimed on "two unpaid bills of exchange in the total sum of US$759,200.49 plus interest".
The two bills were for $671,826.21 and $87,374.28. They were dated November 27 and December 30, 2009, and payable on February 23 and March 23, 2010. The court gave summary judgment for GMAC, the claimant. Summary judgment means the court decided the claim without a full trial.
"bills of exchange are generally treated as cash"
High Court of England and Wales, GMAC Commercial Finance v Mint Apparel, October 7, 2010
An accepted bill or a note can also be sold for cash before it falls due. finances letters of credit, bills of exchange, promissory notes and invoice purchases, the ICC says. Its forfaiting rules, , came into effect on January 1, 2013. UNCITRAL endorsed them on July 14, 2017, the ICC announced. A bank can make a bill or note stronger by adding an , its own guarantee on the instrument. Our forfaiting guide covers the market in depth.
The buyer of a note pays less than its face value, the amount due at maturity. The gap is the . Under a , the charge comes off the face value. Under , the price is the amount that grows to face value at the same rate. US money market rates use a 360-day year, as footnotes to the Federal Reserve's H.15 release explain.
Figure 2 · Try it
What a note is worth before it matures
Set the face value, days to maturity and discount rate, then switch between the two discount methods.
Days to maturity
Annual discount rate (illustrative)
Discount method
Face value paid at maturity
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Cash to the seller today
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Discount
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Formula: straight discount proceeds equal face value times one minus rate times days over 360; discount to yield proceeds equal face value divided by one plus rate times days over 360.
Our Research Desk used a 360-day year and the standard straight discount and discount to yield formulas. The rates shown are for illustration and are not Ossiano pricing.
This calculator explains the concept only. Actual proceeds depend on the obligor, any aval or guarantee, the country and the finance provider.
At the defaults, a $200,000.00 note due in 180 days and discounted at 6.00% pays $194,000.00 under straight discount and $194,174.76 under discount to yield. The gap is $174.76. At 900 days the gap grows to $3,913.04, with proceeds of $170,000.00 and $173,913.04. Our guides to tenor and how trade finance is priced go further.
04 · Which law
Bills follow national law, shaped by a 1930 Geneva uniform law and by UK and US statutes
Each country applies its own law to bills and notes. One shared model dates from 1930. The Convention providing a Uniform Law for Bills of Exchange and Promissory Notes was signed at Geneva on June 7, 1930. It came into force on January 1, 1934, the UN Treaty Collection records.
A later global text has yet to take effect. The 1988 UN Convention on International Bills of Exchange and International Promissory Notes is not in force. It has 5 parties, and 10 actions are required for it to come into force, according to UNCITRAL.
In the United States, Article 3 of the Uniform Commercial Code (UCC) sets the rules for notes and drafts. The UCC is a joint project of the Uniform Law Commission and the American Law Institute. In 2022 the two bodies approved amendments to Articles 1, 2, 2A, 3, 4, 4A, 5, 7, 8 and 9 and a new Article 12, the ALI reports.
This guide describes these laws for reference. For a specific deal, take advice from a qualified lawyer in the country whose law applies.
Figure 3
The laws that govern bills and notes
Each row is a law or convention with its status.
Sources: legislation.gov.uk; North Carolina General Statutes 25-3-104; Uniform Law Commission; American Law Institute; UN Treaty Collection; UNCITRAL status pages.
05 · Paper to electronic
The UK now recognizes electronic bills and notes, following the UNCITRAL model law
A paper trade document works through possession: you must hold it to claim payment, as section 1 of the UK's 2023 Act describes. Electronic documents need a legal match for that. UNCITRAL adopted the Model Law on Electronic Transferable Records, , on July 13, 2017. It aims to "enable the legal use of electronic transferable records" at home and across borders, covering documents such as bills of lading and promissory notes, says UNCITRAL.
The UK followed with the . It received royal assent on July 20, 2023, according to the enacted text, and came into force on September 20, 2023, two months later, according to legislation.gov.uk. Under the Act, an can have the same legal effect as paper.
Section 1 lists eight example trade documents. The first two are the bill of exchange and the promissory note. The others are the bill of lading, ship's delivery order, warehouse receipt, mate's receipt, marine insurance policy and cargo insurance certificate. Our guides to MLETR and digital trade law and electronic bills of lading cover the wider shift.
06 · Ossiano view
An instrument defined in 1882 now has a digital future
Research Desk reading, for Shrini's review.
OBSERVATION 01
A claim that stands on its own
The acceptor promises to pay according to the terms of its acceptance, and the English High Court has said bills "are generally treated as cash". That separate promise is what lets a finance provider buy the claim.
OBSERVATION 02
Built to be sold on
Forfaiting finances bills of exchange and promissory notes, under ICC rules in effect since January 1, 2013. An accepted bill can move from the seller to an investor.
OBSERVATION 03
Electronic form is now law in the UK
The UK Act came into force on September 20, 2023, naming bills and notes among its example trade documents, in line with the UNCITRAL model law adopted in 2017.
Summary
Bills and notes turn a trade debt into a claim that can be signed, sold and paid
A bill of exchange is an unconditional written order from the seller to the buyer to pay. A promissory note is the buyer's unconditional written promise to pay. Once the buyer accepts a bill, it is bound to pay on the terms it accepted. Either instrument can pass to a new holder, and a finance provider can buy it at a discount.
Bills follow national law. The Geneva uniform law came into force on January 1, 1934, while the 1988 UN convention has 5 parties and is not in force. Since September 20, 2023, UK law has recognized bills and notes in electronic form.
Related guides: documentary collections, letters of credit, forfaiting, electronic bills of lading and MLETR and digital trade law. Instrument cards: bill of exchange and promissory note, documentary collection, documents against acceptance (D/A) and forfaiting. Every term is defined in the Trade Finance Glossary.
For questions on how these shifts affect existing or planned trade finance exposures, contact the Ossiano Research Desk.
Sources
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 3, 1882. Supports: definition of a bill of exchange, section 3(1); payable on demand or at a fixed or determinable future time, a sum certain in money; signed by the drawer.
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 83, 1882. Supports: definition of a promissory note, section 83(1).
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 17, 1882. Supports: acceptance as the drawee's assent, section 17(1); written on the bill and signed by the drawee, section 17(2).
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 31, 1882. Supports: negotiation by indorsement completed by delivery, or by delivery for bearer bills.
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 54, 1882. Supports: the acceptor engages to pay according to the tenor of its acceptance, section 54(1).
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, section 2, 1882. Supports: definition of holder.
- North Carolina General Assembly, N.C. Gen. Stat. 25-3-104, Negotiable instrument (UCC 3-104 as enacted), undated. Supports: negotiable instrument definition, 3-104(a); a promise is a note and an order is a draft, 3-104(e).
- International Trade Administration, US Department of Commerce, The Trade Finance Guide: A Quick Reference for US Exporters, July 2022. Supports: a bill of exchange is commonly known as a draft (page 12); under D/A the exporter extends credit using a time draft (page 13).
- International Chamber of Commerce, URC 522 rules text, ICC Digital Library, 1995. Supports: bills of exchange and promissory notes as financial documents, Article 2(b); the presenting bank's check of the form of acceptance, Article 22.
- High Court of England and Wales, Commercial Court (The National Archives Find Case Law), GMAC Commercial Finance Ltd v Mint Apparel Ltd [2010] EWHC 2452 (Comm), October 7, 2010. Supports: the claim of US$759,200.49 plus interest; the 80% advance and bill for 100% of invoice value; bill amounts and dates; bills generally treated as cash; summary judgment.
- International Chamber of Commerce, ICC rules on forfaiting now in effect, January 7, 2013. Supports: URF in effect from January 1, 2013; instruments forfaiting finances.
- International Chamber of Commerce, UN endorses ICC Uniform Rules for Forfaiting (URF 800), August 22, 2017. Supports: UNCITRAL endorsement of URF 800 on July 14, 2017.
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: discount-basis quotation (footnote 4) and the 360-day year (footnote 3), used in Figure 2.
- United Nations Treaty Collection, Convention providing a Uniform Law for Bills of Exchange and Promissory Notes (MTDSG, League of Nations treaties, Part II-10), undated. Supports: signed at Geneva on June 7, 1930; in force January 1, 1934.
- UNCITRAL, Status: United Nations Convention on International Bills of Exchange and International Promissory Notes (New York, 1988), undated. Supports: not in force; 5 parties; 10 actions required for entry into force.
- Uniform Law Commission, Uniform Commercial Code, undated. Supports: the UCC is a joint project of the ULC and the ALI.
- American Law Institute, Uniform Commercial Code project page, undated. Supports: 2022 amendments to UCC Articles 1, 2, 2A, 3, 4, 4A, 5, 7, 8 and 9 and a new Article 12.
- UNCITRAL, UNCITRAL Model Law on Electronic Transferable Records (2017), 2017. Supports: adoption on July 13, 2017; purpose, covering documents such as bills of lading and promissory notes.
- legislation.gov.uk, Electronic Trade Documents Act 2023, enacted text, 2023. Supports: royal assent on July 20, 2023.
- legislation.gov.uk, Electronic Trade Documents Act 2023, 2023. Supports: in force on September 20, 2023, two months after passing.
- legislation.gov.uk, Electronic Trade Documents Act 2023, section 1, 2023. Supports: possession of a paper trade document, section 1(1); eight example trade documents, section 1(2).
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