The bill of exchange is a classic financial instrument that has been used for centuries as a key tool in commercial transactions. Although its origin dates back to the 12th century, it is still relevant today to guarantee the payment of a debt within a certain period of time. This commercial document not only replaces the use of cash in many cases, but also offers a solid guarantee of payment, making it an attractive option for companies and individuals who want to ensure their collections efficiently.
In this article, we will explain in detail the characteristics of the bill of exchange, the agents involved in its issuance and how it differs from other financial documents such as the bank promissory note. If you are interested in knowing how this security can help you manage and protect your commercial transactions, keep reading.
1. What is a bill of exchange?
It is a commercial document that has official status, as it is stamped by the State and meets the requirements defined in the Exchange and Check Law 19/1985.
It can be defined as a commercial document by which a natural or legal person undertakes and is obligated to pay a certain amount of money to another person within a defined period of time.
It is, therefore, a security that certifies and guarantees a debt between its protagonists.
Therefore, among its functions we highlight the following:
Payment method: It replaces cash, just as the bank note does.
Guarantee payment: The beneficiary of the bill of exchange may take legal action in the event of non-payment.
2. Characteristics of the Bill of Exchange
The bill of exchange is a financial instrument distinguished by its flexibility and usefulness in a variety of commercial situations. Understanding its fundamental characteristics facilitates its efficient use in commercial transactions.
Formality and Requirements
The bill of exchange must meet essential requirements, such as the identification of the issuer, the drawee, and the beneficiary, the amount payable, and the due date. The absence of any of these elements may invalidate the document.
Transferability
One of the most notable features is its transferability. Through endorsement, the beneficiary can assign his or her rights to a third party, thus allowing them to circulate on the market.
Function as a Guarantee
In addition to being a means of payment, a bill of exchange acts as a guarantee for the parties involved. In the event of nonpayment, the beneficiary has legal rights to demand compliance with the obligation.
Adaptability to Business Needs
There are various types of bills of exchange, such as those payable at sight or at a fixed term, which offer flexibility according to business needs. This adds significant value to international transactions.
Geographic coverage
Thanks to its global acceptance, the bill of exchange is an essential tool for merchants operating in different countries, facilitating international trade with uniform standards.
3. Parts of a bill of exchange
It has several fundamental elements that characterize it and make it valid. Knowing its component parts is key to understanding how it works. The main ones are:
Drawer: The person who issues the bill of exchange and orders payment. This is the person who owes the debt that must be settled through this instrument.
Freed: It is the person or entity who is ordered to make the payment, that is, the person who must comply with the payment of the amount established in the bill of exchange.
Beneficiary: The person or entity to whom payment must be made. Generally, the beneficiary is a third party entitled to receive the amount established in the bill.
Amount of money: This is the sum of money that must be paid. This amount must be clearly stated on the bill of exchange.
Use by date: This is the day on which payment is due. This can be a specific date or, in some cases, a specific period from the date of issue.
Place of payment: The place where payment must be made, which may be stipulated in the bill.
Signature of the drawerThe drawer's signature is essential, as it validates and grants legitimacy to the document.
4. How a bill of exchange works
Although the process for using it is quite simple, it involves a series of steps to ensure compliance with the obligation. Below, we detail how it works in practice:
EmissionThe drawer issues the bill of exchange to a beneficiary. In this step, the drawer specifies the amount of money the drawee must pay on a specific date. It's important that this document be clear and precise in terms, as any errors could invalidate the agreement.
AcceptanceThe drawee has the option to accept the bill of exchange. If the drawee accepts, it means they agree to pay the stated amount on the stipulated date. If they do not accept, the agreement will not be valid, and the process will not continue.
EndorsementIf the beneficiary decides to transfer the right to collect the bill of exchange to another person, they can do so through an endorsement. Endorsement is a procedure by which the beneficiary signs the back of the bill and transfers the right to collect it to another person, who will then become the new beneficiary of the bill.
PaymentThe beneficiary or the person who received the endorsement may present the bill of exchange to the drawee on the due date to request payment. If everything is in order, the drawee will proceed to pay the stipulated amount.
PaymentPayment can be made in different ways, depending on the parties' agreement: in cash, by bank transfer, or by other means. Once payment is made, the drawee releases his obligation and the process concludes.
5. Types of bills of exchange
There are different types used depending on the needs of the parties involved. Some of the most common types are:
Simple bill of exchange: This is the most common form. It stipulates that the drawee must pay the indicated amount on a specific date.
Sight bill of exchangeIn this case, payment must be made immediately upon presentation of the bill. This is a more flexible type of bill of exchange, as there is no specific deadline; payment is due upon sight of the person presenting the document.
Installment bill of exchange: Instead of a single payment, payment is made in several installments over a specified period. This type of letter is used when the debt cannot be repaid in a single installment, but rather in several installments.
Negotiable bill of exchangeThis type of bill of exchange is transferable. The beneficiary can endorse it to a third party, who will then become the new holder of the bill. This makes the bill of exchange very useful in commercial transactions, as it can be circulated between different parties.
6. Advantages and disadvantages
Advantages of using the bill of exchange
It offers several advantages for both the issuer and the beneficiary and the drawee. Below, we highlight some of the main ones:
Security: It is a legally binding document, which guarantees that payment will be made according to the agreed terms. If payment is not made, the affected party can resort to legal action to enforce compliance.
Ease of TransferThanks to endorsement, a bill of exchange is a transferable instrument, making it a very flexible and useful medium in commercial transactions. This ability to transfer the debt to another person can be a significant advantage.
Flexibility: The bill of exchange can be tailored to the needs of the parties involved. Terms, payment conditions, and other details can be agreed upon depending on the circumstances of the transaction.
Formality and Transparency: As a formal document, the bill of exchange clearly and precisely establishes the terms of payment, avoiding confusion or misunderstandings.
Disadvantages of the bill of exchange
Although it is a very useful tool, it also has some disadvantages that should be considered:
Dependence on the Drawee's AcceptanceIf the drawee does not accept the bill of exchange, payment cannot proceed, which can cause problems.
Default RiskDespite its formal nature, there is always a risk that the drawee will not make payment on the established date. If this occurs, the beneficiary must resort to legal action to enforce compliance.
Legal Procedures: In the event of non-payment, legal proceedings can be complicated and costly, especially if the parties are located in different jurisdictions.
7. Difference between Bill of Exchange and Promissory Note
The difference between a bill of exchange and a promissory note lies in several aspects that go beyond their technical definitions. Both are used as instruments to formalize the promise or obligation of payment, but each has unique characteristics that make them more appropriate for certain contexts.
Origin and Historical Evolution
The bill of exchange has a long history in trade and finance, originating in the Middle Ages to simplify commercial transactions. The promissory note, more recent, was designed to be a simpler and more straightforward document, facilitating agreements between two parties.
Formality and Complexity
A bill of exchange is usually more formal and requires compliance with specific legal requirements, including the use of stamped paper. In contrast, a promissory note has fewer formalities, allowing for greater flexibility in its drafting.
Flexibility and Common Uses
Promissory notes are favored in situations where a relationship of trust is paramount, such as personal loans. Bills of exchange, on the other hand, are preferred in more complex transactions involving multiple parties, such as international business deals or large commercial agreements.
Legal Implications
Legally, the difference lies in their binding force. A bill of exchange, being a payment order, legally binds the acceptor once signed. A promissory note, although less formal, is still a compelling legal document but only commits the issuer to future payment.
Impact on Accounting
For those who handle accounting, understanding the difference between a bill of exchange and a promissory note is crucial, as it influences how a debt is recorded on the books and the tax treatment applicable to each.
In conclusion, although both documents can be used to formalize a debt, their differences should be considered in the business or personal context, considering factors such as the desired formality, the parties involved, and the nature of the financial commitment.
