How Do Bills of Exchange and Promissory Notes Differ?

In business, bills of exchange and promissory notes are just as significant as cheques. However, these concepts, which are essential for commercial transactions and financing reasons, are rarely discussed. When a debtor acquires items on credit, bills of exchange are one of the most important negotiable documents. The creditor sends a bill of exchange to the debtor, instructing him to pay the amount within the specified time frame. A bill of exchange is a negotiable instrument used in trade transactions that orders one party to pay a specified sum of money to another party at a predetermined future date.

FAQs on Promissory Note vs. Bill of Exchange: Definitions and Differences

A promissory note can also be a mode of payment by the maker, who can pay the payee or a third party by issuing a promissory note. The payee or the third party can either hold the promissory note till maturity or negotiate it with another person. Bills of exchange are more commonly used in trade transactions to facilitate credit and ensure payment between parties. A bill of exchange provides multiple avenues for enforcement, as liability can extend to both the drawer and the drawee, depending on whether the instrument was accepted. If dishonored, the holder can initiate legal proceedings against any party who has endorsed or guaranteed the bill. This ensures that all parties in the chain are aware of the default and can take necessary actions.

Differences Between Bill Of Exchange And Promissory Note

Through bills of exchange, the creditor sends an order to the debtor that the latter should pay the amount within the stipulated time. A promissory note is that monetary instrument wherein the maker, in writing, promises to pay at a specified date or on demand a certain sum of money payable to the payee. They are generally used in loan transactions wherein one of the parties requires borrowing funds or credit. They thus become legally binding and are considered proof of the debt between the two parties. A promissory note is a type of negotiable tool which contains a written promise of full payment. These are duly signed and stamped by its drawers, declaring to pay a certain sum of money to the holder at a specific date or on-demand.

A promissory note is a financial instrument containing a written promise to pay a specified sum of money. The maker who issues the note promises to pay the payee or bearer an amount on demand or at a specified future date. It is a negotiable instrument, implying it can be endorsed and transferred from one party to another. A promissory note provides proof of a debt obligation that the maker owes the payee. It also provides financing by enabling the payee to collect money from the maker in the future. The payee may discount or sell the note to convert it into cash immediately.

Two commonly used instruments are the bill of exchange and the promissory note, both serving as written commitments for payment but differing in structure and function. Understanding these differences is essential for anyone dealing with trade finance or credit arrangements. While promissory notes, bill of exchange, and cheque have some similarities among themselves, these are distinctly different from each other.

Vedantu provides notes and questions on the difference between promissory notes and bills of exchange. It discusses features of promissory notes and bills of exchange, as well as their differences. Professional educators create content that is simple to understand and remember for students.

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A cheque, on the other hand, is a request from a bank’s client to have the bank pay someone from a specified account. A bill of exchange asks for payment from the receiver, regardless of where the cash came from. When a drawer dishonors a bill of exchange, notice is served to every party involved in the relevant transaction. It might involve three parties, which are drawer/maker, drawee, and payee. The most important feature of Promissory Note is, once it is drawn by the debtor, it need not be accepted by the creditor. Difference between promissory note and bill of exchange is one of the most asked questions in commerce related exams such as the UGC-NET Commerce Examination.

They can also require the buyer to pay a third party—a bank—in the event that the buyer fails to make good on his agreement with the seller. With such a stipulation, the buyer’s bank will pay the seller’s bank, thereby completing the bill of exchange, then pursue its customer for repayment. A bill of exchange can be endorsed in blank, making it payable to the bearer, or by a restrictive endorsement, limiting further negotiation. These endorsements affect the rights of subsequent holders, particularly in cases of dishonor. A holder in due course—a party who acquires the bill for value, in good faith, and without knowledge of defects—gains stronger legal protections, ensuring payment despite disputes between prior parties.

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The note can also facilitate payments by allowing the maker to purchase goods or services from the payee on credit by providing a written promise to pay later. Promissory notes are versatile instruments that make credit transactions and short-term financing possible between parties through a binding written promise of future payment. Bills of exchange are widely used in trade finance, particularly in international transactions where buyers and sellers operate across different legal and financial systems. Exporters often rely on them to secure payments, sometimes discounting accepted bills with banks to obtain immediate liquidity.

• A bill of exchange is a written order issued by one party (the drawer) to another party (the drawee) directing the drawee to pay a specified sum of money to a third party (the payee).
• So, when one is working with these two, he/she should be known about the meaning and features.
• A promissory note is an instrument that contains the written and signed promise by the maker(the debtor) to pay a certain amount to the creditor on a specific date or on-demand.
• You write a promissory note as a written promise to a creditor to pay a certain amount at a specified time or on demand.
• Similar to the difference between promissory notes and bill of exchange, there are numerous crucial topics in the standard 10 + 2 curricula for commerce students.

A bill of exchange is issued by the creditor difference between bills of exchange and promissory note and a Promissory Note is issued by the Debtor. In the former, 3 parties are involved i.e., drawer, drawee and payee, in the latter 2 parties are involved i.e., a drawer and the payee. Bills of exchange are more negotiable as they can be transferred through endorsement to multiple parties, whereas promissory notes are typically non-negotiable and involve only the maker and the payee. No, a promissory note does not require acceptance from the payee as it is a direct promise from the maker to pay.

Relevance in Commercial Transactions

• The bill of exchange and promissory note facilitates credit purchase and loans for the individuals, traders and the government.
• In this case, Mr P is both the drawer as well as the payee, whereas Mrs Q is the drawee.
• This direct liability makes promissory notes particularly useful in lending arrangements where the lender wants a clear, enforceable commitment from the borrower without reliance on intermediaries.
• It also provides financing by enabling the payee to collect money from the maker in the future.
• Requiring to be accepted by a debtor to be valid, these are usually the payment for goods and services.

An international bill of exchange is a document that permits one party to demand payment from another. If you liked it, please share it on your social networks so that more people can learn about the differences between a bill of exchange and a promissory note! We would also love to hear your opinion, so please leave us a comment and if you have any questions, please do not hesitate to contact us. In this section, we will answer the most frequently asked questions related to the differences between a bill of exchange and a promissory note.

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She has held multiple finance and banking classes for business schools and communities. While a bill of exchange can have different entities as its drawer, drawee, and payee; it can also have one entity serving as its drawee and payee. When a drawer dishonors a promissory note, no notice is served to this individual. In the case of bills of exchange, the liability of its drawer is only secondary and conditional. These are issued by creditors and contain their stamp and signature along with a predetermined date for payment and a fixed amount.

The bill of exchange facilitates the payment process and acts as a type of negotiable instrument. Promissory notes and bills of exchange are necessary credit instruments in business transactions. Though sharing some standard features, they have significant differences in the parties involved, liability conditions, negotiability, and usage.

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