While this table above describes fundamental differences between promissory notes and bills of exchange, students should also learn their differences to that of a cheque – another financial instrument. Both bills of exchange and promissory notes are two financial instruments the traders use to ensure that a deal has been agreed upon. Unlike promissory notes, bills of exchange require an additional step called acceptance. The drawee must accept the bill by signing it, which converts them into an acceptor. This acceptance process is crucial because it transforms the drawer’s order into a binding commitment by the drawee. A promissory note does not require an external party’s involvement in the payment process.
Legal Framework Governing the Instruments
While they serve similar broad purposes, there are important differences between the two types of instruments. A promissory note is a written agreement between buying and selling parties in domestic trade. In fact, the function of a promissory note is similar to that of a bill of exchange. To elaborate further, a promissory note acts as a financial instrument or a written promise by the buying party to pay the selling party in exchange for the goods purchased.
Promissory notes can also be used in business transactions or as a way to formalize a loan from a family member or friend. This type of instrument is essentially a formalized IOU, requiring one person to pay another by a set date. A promissory note is a written promise by the drawer (the borrower) to pay the payee (the person loaning the money).
These instruments carry a demand or a promise to pay a certain amount of money within a stipulated period of time. According to the traditional concept, cash is an inevitable part of every transaction. 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.
Through bills of exchange, the creditor sends an order to the debtor that the latter should difference between bills of exchange and promissory note pay the amount within the stipulated time. Promissory notes, on the other hand, are more prevalent in structured financing arrangements, including personal loans, corporate borrowings, and intercompany lending. They provide a straightforward mechanism for documenting debt obligations without requiring a third-party intermediary.
Business Law
The maker can also discount the promissory note with a bank or a financial institution and get cash in advance. For businesses, the choice between these instruments is not merely academic—it has practical implications for credit management, liquidity, and risk mitigation. For legal practitioners, a thorough understanding of the distinct features, advantages, and limitations of each instrument is indispensable for drafting, advising, and enforcing commercial agreements.
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. While a cheque is a type of Bill of Exchange, the key difference is who the drawee is. In a regular Bill of Exchange, the drawee can be any person or business entity. In the case of a Cheque, the drawee must always be a specific bank where the drawer holds an account.
To pay for credit sales a buyer may make a written promise in form of a promissory note or a bill of exchange. Below is a compilation of the major points of difference between a bill of exchange and a promissory note. If a Bill of Exchange is dishonoured (i.e., the drawee refuses to accept or pay it), the holder must provide a formal notice of dishonour to the drawer and any prior endorsers.
Non-Sampling Error Examples in Finance and Accounting Explained
In a business scenario, Supplier A (drawer) supplies goods to Buyer B (drawee). Supplier A then issues a bill of exchange to Buyer B for payment within 60 days. Buyer B accepts the bill, thereby agreeing to pay the specified amount to Supplier A (or another payee) at the end of the 60 days. 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.
Content: Bill of Exchange Vs Promissory Note
This acceptance creates a binding obligation on the drawee to honor the payment. A promissory note, however, only requires the maker’s signature, as it is a unilateral commitment. The acceptance requirement in a bill of exchange introduces an additional layer of legal responsibility, particularly if the drawee refuses to accept it. Bills of exchange and promissory notes are written commitments between two parties that confirm a financial transaction has been agreed upon. Bills of exchange are more often used in international trade, whereas promissory notes are used most often in domestic trade.
- Unlike promissory notes, bills of exchange require an additional step called acceptance.
- In bills of exchange, the drawer’s liability is secondary and conditional.
- The maker can also discount the promissory note with a bank or a financial institution and get cash in advance.
- A bill of exchange obligates the drawee to pay upon maturity, but only after acceptance.
- There are instances when the bill of exchange is juxtaposed with a promissory note.
FAQs on Promissory Note vs. Bill of Exchange: Definitions and Differences
The maker cannot escape this responsibility by pointing to someone else’s failure to pay. The promissory note is of the same nature, but it’s issued by the debtor on which he promises to pay off the required amount within a particular time. Understanding these concepts will help you understand the business from a practical perspective, and you would be able to implement these in your own business/job. Promissory notes are also negotiable instruments which promise to pay a certain amount within a particular period of time. Bills of exchange are negotiable instruments that demand money from debtors within a stipulated period of time.
- Understanding the difference between bill of exchange and promissory note is essential for Commerce students.
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- Through bills of exchange, the creditor sends an order to the debtor that the latter should pay the amount within the stipulated time.
- Vedantu ensures you understand these key Commerce topics with clarity and confidence.
If you’re lending money to someone or borrowing from a bank, a promissory note clearly establishes the debtor-creditor relationship. Personal loans, business loans, and installment purchases commonly use promissory notes because they involve direct transactions between two parties. A bill of exchange is also a negotiable tool, which is a written note legally bound, and duly stamped and signed by its drawer. It instructs payment of a certain sum of money to the holder of this instrument on demand, or within a specific time frame. Requiring to be accepted by a debtor to be valid, these are usually the payment for goods and services. Most people are familiar with promissory notes because you must sign them when you take out a car loan, student loan, or mortgage.
Trade Finance Talks
Promissory notes are used for lending, personal loans, or private borrowings and are defined under Section 4 of the Negotiable Instruments Act, 1881. 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.
When transferred, the new holder assumes the same rights as the original payee but may face greater scrutiny, particularly if the note lacks a clear endorsement history. This reduced flexibility makes promissory notes more suited for structured financing rather than open trade transactions. Understand the key differences between bills of exchange and promissory notes, including their legal roles, payment terms, and use in financial transactions.
Women in Trade, Treasury & Payments
In this case, Mr P is both the drawer as well as the payee, whereas Mrs Q is the drawee. Every distinguishing feature about a bill of exchange vs promissory note is listed below in detail. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. A bill of exchange is transferable (much in the same way you can endorse a check to someone else).