Bill of Exchange

A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.

Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.

A bill of exchange is usually defined as:

An unconditional order in writing Addressed by one person (the drawer) to another (the drawee) Signed by the person giving it (the drawer) Requiring the person to whom it is addressed To pay on demand, or at a fixed or determinable future time A sum certain in money To, or to the order of, a specified person or to bearer (the payee)

The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time. The draft is widely used in international trade, most frequently in the payment against a letter of credit (L/C). It is also used in the open account without any L/C involved. Drafts Drawn On the Bank In the L/C sample, the draft is drawn on the confirming bank, which is The Moon Bank. The UVW Exports may issue a draft drawn on The Moon Bank as follows:

Sample Instrument: Draft

The "No." (number) in the above sample draft may be used for the exporter's reference number. Blank drafts are available at the paying bank.

First of Exchange (Second Unpaid) and Second of Exchange (First Unpaid) In practice, it is not uncommon that two drafts are drawn on the drawee bank in a letter of credit (L/C) to ensure that at least one draft reaches the drawee when they are dispatched separately. The issuance of more than one draft in a letter of credit follows the same logic as in the issuance of bill of lading in more than one original. At times even three drafts may be drawn on the drawee bank, this practice was not uncommon before in certain countries. In contrast, normally one draft (sola bill) is issued in a documentary collection where the draft is drawn on the importer.