The term “bill of exchange” is a written agreement between two parties, the buyer and the seller. Also, they are generally used in international exchange.
This documentation indicates that a purchasing party has accepted that they must pay a selling party a certain amount at a fixed time for delivered materials.
The terms “promissory notes” are entirely the same as bills of exchange in that they are a financial instrument that is a written promise by one party to pay another.
They are also known as debt notes that support financing for an individual or a company source aside from a traditional lender.
- A Bill of exchange is a written order from one person (drawer) to another (drawee) to pay a specified sum of money to a third party (payee) on a selected date or demand.
- A promissory note is a written promise from one person (maker) to pay a specified sum of money to another person (payee) on a selected date or demand.
- A Bill of exchange involves three parties (drawer, drawee, and payee), while a promissory note involves two parties (maker and payee).
Bill of Exchange vs Promissory Note
A bill of exchange is issued by the creditor 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. In the former, liability of the drawer is primary unlike the latter.
|Parameter of Comparison||Bill of Exchange||Promissory Note|
|Definition||When debtors face a demand to pay the money within a required amount of time, then we mention this sort of negotiable instrument as bills of exchange.||When a debtor in a commercial written document promises to the creditor to pay the specified amount of money at a specific date, then we mention this type of negotiable instrument as a promissory note. In other words, promise to pay a certain amount of money later.|
|Parties they have||It has three parties: a drawer, drawee, and payee.||It has two parties, as- maker and the payee.|
|Who can draw them?||The bill of exchange tends to get drawn by the creditor.||The promissory note tends only to get drawn by the debtor.|
|Acceptance||To be called valid, the bill of exchange has to get accepted by the debtors.||There is no such thing in the promissory note.|
|Where are they used?||In accounting, a bill of exchange is used to settle trading debts.||In accounting, a promissory note is generally used to borrow money.|
What is the Bill of Exchange?
A bill of exchange is a form of negotiable instrument which carries the buyer’s statement to the seller regarding the amount of money to be paid. The payee, the drawee, and the drawer are three parties who play a pivotal role in the process.
In case of dishonour, notice to all the parties involved should be given before due time. The drawer must sign and stamp the bill of exchange, which carries the order to pay the amount to the instrument carrier.
It should be kept in mind that the order is not a command in this regard. The date is a must for this instrument. There should be no error. Otherwise, it will lose validity.
The bill must be accepted by the party who carries it.
For collection, the drawee must show the document to the payee. The amount of money that should be paid must be particular and definite and included in the document.
The buyer in the process or the maker of the bill must sign the documents associated with the bill. To settle the debt between the parties the usage of the Bill of Exchange is widely seen in practice.
What is a Promissory Note?
To put it simply in writing, a promissory note is an unconditional written document that promises to pay a certain amount of cash at a future date by the debtor to collect a fixed amount of money from the creditors.
The document must also be signed by the debtor and stamped to give it the validity required by the law before giving it to the creditor. To collect the cash on a future date, the creditor must show the original note that was made.
There are only two parties in the process as- payee and the drawer. The market viability of the document is primary and absolute in terms of characteristics.
The date the debtor will pay the money must be written in the document.
The amount of money must also be written, and both parties must have definite knowledge about it. A promissory note is very formal regarding the term ‘legal contract’.
In usage to corporations or high-net-worth individuals, promissory notes have historically been narrowed in the United States. Still, they have become more frequently used, in real estate transactions.
Main Differences Between Bill of Exchange and Promissory Note
- Sometimes the drawer and payee might be the same person in the bill of exchange. At the same time, a promissory note is not allowed to make any payment to the maker himself.
- In a bill of exchange, according to the drawer’s direction, there is an unconditional order for the drawee to pay. On the other hand, a promissory note carries an unconditional promise by the maker to pay the payee.
- The bill of exchange has three parties: as-drawer, drawee and payee. However, there is a chance that the same individual may portray two out of the three parties. And in a promissory note, there are only two parties, the maker or the debtor and the payee or the creditor.
- A bill of exchange is payable after its appearance has to be accepted by the drawee on his behalf before it can be displayed for payment. Diversly, a promissory note is given to make a payment without any earlier acceptance by the maker.
- If a bill of exchange is dishonoured, the holder must present an unpaid notice of dishonour to the drawer and the immediate indorsers. For promissory note, there is no such notice that needs to be given in the case of any dishonouring events.
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.