Bill of exchange and promissory note
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A signed piece of paper that orders or promises payment of a fixed sum, on demand or on a set date, and that can be passed on or sold.
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01 · In plain words
A signed paper that orders or promises payment of a fixed sum on a set date
A is a written order. The seller signs it and tells the buyer to pay a fixed sum of money. The money is due on demand or at a fixed or set future date. In trade, a bill of exchange is also called a draft (US International Trade Administration).
A is a written promise. Here the buyer signs it and promises to pay the seller a fixed sum, on the same kind of terms (UK Bills of Exchange Act 1882, section 83). US law uses the same split. A promise to pay is a note. An order to pay is a draft (US Uniform Commercial Code, section 3-104 (North Carolina text)).
Both must be unconditional. The paper says "pay this sum" with no "if" attached (UK Bills of Exchange Act 1882, section 3). Once the buyer accepts the bill, or signs the note, the seller holds a clear, signed promise to pay. The seller can keep it until the due date, pass it to someone else, or sell it for cash now.
Who is involved
- The seller who writes and signs a bill is the .
- The buyer the bill is addressed to, and who must pay, is the . Once the buyer signs to agree, the buyer is called the acceptor.
- The buyer who signs a promissory note is the .
- The payee is the person named to receive the money. The bill can also be made payable to whoever holds it.
- The holder is the payee, or a later owner of the bill, who has the paper in hand (UK Bills of Exchange Act 1882, section 2).
02 · How it works
Six steps take a bill of exchange from the seller's signature to payment
Figure 1 · Interactive
A bill of exchange in a sale on credit, step by step
For a promissory note, the buyer writes and signs the promise and gives it to the seller. There is no step 1 or step 3.
Source: UK Bills of Exchange Act 1882, sections 3, 17, 31 and 54; ICC, URC 522 on what the bank checks; ICC on forfaiting. The order of steps is our reading of these sections.
03 · What it means for you
The exporter gets a signed promise it can sell, and the importer gets time to pay
Figure 2 · Interactive
What a bill or note means for each side
Choose your side of the trade.
04 · Worked example
Selling a $1 million bill 180 days early at an illustrative 5% a year brings in $975,000
This example uses round, made-up numbers. The exporter holds a bill of exchange for $1,000,000, accepted by the buyer and due in 180 days. A finance provider buys it today. It takes its charge off the face value, a , at 5.00% a year on a 360-day year. The sum works the same way for a promissory note.
Figure 3 · Illustrative
Selling a $1,000,000 accepted bill 180 days before it is due
Illustrative inputs. The cash to the exporter is highlighted.
Made-up rate, worked out by our checking script. Real rates depend on the buyer, the country, the provider and the deal.
05 · When to use it
A bill or note suits sellers who give credit and want a signed promise they can sell
Good fit when
- You give the buyer time to pay and want the buyer's signed, written promise in return (Bills of Exchange Act 1882).
- You may want cash before the due date by selling the paper, for example through forfaiting.
- You send documents through banks and want the buyer to accept a bill to get them. See documentary collection, documents against acceptance.
Another tool may suit better when
- You cannot meet the formal steps of the law that applies, such as an acceptance written on the bill and signed by the buyer. Look at open account.
- You want a bank's promise to pay on a later date. Look at a usance letter of credit.
- You need one international treaty to govern a paper bill across borders. The 1988 UN convention on international bills and notes has not entered into force (UNCITRAL), so check which national law applies.
06 · Rules and a real case
National laws set the rules for bills and notes, and an English court enforced two unpaid bills
In the UK, the Bills of Exchange Act 1882 sets the rules (legislation.gov.uk). In the US, each state enacts Article 3 of the Uniform Commercial Code, a joint project of the Uniform Law Commission and the American Law Institute (ULC). A third system is the Geneva uniform law, signed on June 7, 1930 and in force since January 1, 1934 (UN Treaty Collection). The ICC rules for collections, , list bills of exchange and promissory notes as financial documents (ICC). When a bill or note is sold through forfaiting, the parties can use the ICC , in effect since January 1, 2013 (ICC).
Bills and notes can also be electronic records. The UNCITRAL covers documents such as promissory notes (UNCITRAL). In the UK, the received royal assent on July 20, 2023 and came into force two months later (legislation.gov.uk).
A real case. In GMAC Commercial Finance v Mint Apparel, decided on October 7, 2010, a trade finance provider paid exporters 80% of each invoice. It then drew a bill of exchange on the importer for 100% of the invoice value. Two accepted bills, for $671,826.21 and $87,374.28, fell due on February 23 and March 23, 2010, and were not paid. The claim was for US$759,200.49 plus interest. The High Court in London said that bills of exchange are generally treated as cash, and gave judgment for GMAC, the finance company that brought the claim, without a full trial (High Court judgment).
Summary
A bill or note turns the buyer's debt into a signed paper the seller can hold or sell
The seller gets the buyer's signed promise to pay a fixed sum on a set date. The buyer gets time to pay. The seller can wait for the due date or sell the paper for cash now. Get the paper right: no conditions, a fixed sum, a clear date and a signed acceptance.
Related guides: Bills of exchange and promissory notes; Documentary collections; Forfaiting; The payment terms spectrum. Related cards: Documentary collection, documents against acceptance (D/A); Forfaiting. Every term is in the Trade Finance Glossary.
Sources
- legislation.gov.uk (The National Archives), Bills of Exchange Act 1882, sections 2, 3, 17, 31, 54 and 83, 1882, revised text. Supports: definitions, the parties, acceptance, passing a bill on, the acceptor's duty to pay
- North Carolina General Assembly, N.C. Gen. Stat. 25-3-104, Negotiable instrument (UCC 3-104 as enacted), undated. Supports: note and draft under US law
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), July 2022. Supports: a bill of exchange is also called a draft
- International Chamber of Commerce, URC 522 rules text, ICC Digital Library, 1995. Supports: financial documents, what the bank checks on acceptance
- International Chamber of Commerce, ICC rules on forfaiting now in effect, January 7, 2013. Supports: forfaiting of bills and notes, URF 800 start date
- United Nations Treaty Collection, Convention providing a Uniform Law for Bills of Exchange and Promissory Notes, Geneva, 1930 (MTDSG Part II-10), undated. Supports: Geneva uniform law dates
- UNCITRAL, Status: UN Convention on International Bills of Exchange and International Promissory Notes (New York, 1988), undated. Supports: the 1988 convention is not in force
- Uniform Law Commission, Uniform Commercial Code, undated. Supports: the UCC as a joint ULC and ALI project
- UNCITRAL, UNCITRAL Model Law on Electronic Transferable Records (2017), 2017. Supports: electronic promissory notes
- legislation.gov.uk (The National Archives), Electronic Trade Documents Act 2023, July 20, 2023. Supports: royal assent and start date
- High Court of England and Wales, Commercial Court, GMAC Commercial Finance Ltd v Mint Apparel Ltd [2010] EWHC 2452 (Comm), October 7, 2010. Supports: the real case
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