Financial Documents

In international trade, there are two financial documents which provide for payment by the buyer. These are the bill of exchange and the promissory note.

Bills of exchange are a commonly used method of settlement in international trade. A bill of exchange is defined by the Bills of Exchange Act 1882 as:

1. an unconditional order in writing;

2. addressed by one person (the drawer);

3. to another (the drawee);

4. signed by the person giving it (the drawer);

5. requiring the person to whom it is addressed (the drawee);

6. to pay;

7. on demand, or at a fixed or determinable future time;

8. a sum certain in money;

9. to, or to the order of, a specified person, or to bearer.

An example of a bill of exchange is given below, with the items shown above indicated by their reference letter:

№ 178/3 31st March__________________19X4___For (h) £ 2,400 At (g) 60 days’ sight _____(a) (f)__ Pay this First of Exchange ____________________________________________ to the Order of ________(i) ourselves __ __________ ___________________________ two thousand four hundred pounds Value in merchandise shipped to which place to Account Spain Invoice no. 12345 To (c) Muchos Gracias SA (b) For and on behalf of (e) Pueblo Lucia, Malaga Sellem Abroad plc (d) BPPrior

When a term bill is addressed to the drawee, the drawee should sign the bill on receipt to indicate his acceptance of the order. After acceptance, the drawee becomes known as the “acceptor”.

A bill might be drawn in sterling or a foreign currency, depending on the terms of sale between the exporter and the foreign buyer.

Sometimes, the exporter might draw two bills of exchange on the foreign

buyer, for the same shipment of goods. This is to provide “insurance” against the loss in transit of one of the bills:

1. one of the two bills will read “Pay this first (bill) of exchange, second of the same tenor and data unpaid”.

2. the second bill will read “Pay this second (bill) of exchange, first of the same tenor and data unpaid”.

If only one bill is to be drawn it is referred to as sole.

Bills of exchange can be divided into two types.

1. A sight bill, which means that payment, is due immediately on sight of the bill – ie “at sight”.

2. A term bill (also known as a tenor or usance bill) which allows the drawee a period of credit before payment. A bill might state the term for payment to be, say, “45 day sight” which means that payment must be 45 days after sight of the bill (and associated documents). This period before maturity of the bill is referred to as the tenor of the bill. Alternatively, a bill might be payable one, two or three months etc after the date of shipment. The bill would then state “At 60 days’ date, pay this first bill of exchange…” and the bill would be payable 60 days after the date of the bill.

The bill of exchange shown above is a term bill of exchange.

The bill of exchange can also be divided into:

1. trade bills. These are bills which are drawn on and accepted by a commercial firm;

2. bank bills . These are bills drawn on and accepted by a bank. Such bills carry very little risk if the bank is first class and so can be discounted at the finest rate – ie at the lowest rate of discount;

3. accommodation bills. These are used by banks to provide accommodation finance to some companies.