Types of Bills of Exchange

Bills of exchange is defined as a type of written trading instrument that contains an unconditional order to pay a particular amount of money written on the bill to the person at a pre-agreed date which is mentioned on the face of the bill and is signed by the acceptor of the bill of exchange. Bills of Exchange can be of many types ranging from Trade Bills, Documentary Bills, Foreign Bills, Supply Bills, etc.

Key takeaways from Bills of Exchange:

• Bills of exchange is a negotiable instrument governed by the Negotiable Instrument Act, 1881.
• Bills of exchange are also legally enforceable if it is duly signed and stamped, which builds trust among both parties and any business transaction comes into action without any hassle.
• Under bills of exchange in order to complete a transaction grace period of three days is also given to the creditor to discharge his liabilities on time.

Characteristics of Bills of Exchange

1. Must be in Writing: A bill of exchange shall be valid only if it is written, mere verbal agreement or verbal promise to pay is not under the ambit of bills of exchange, it should be a written document where both parties agree to the contract to make it legally enforceable.

2. Promise to Pay Must be Unconditional: Bills of exchange payable on performance and non-performance of any event or act, or happening or non-happening of the event is not categorized as a bill of exchange. Promise to pay should be definite and unconditional only then it will be a valid bill of exchange.

3. Duly Stamped and Signed: A bill of exchange should be signed by the maker and drawee, as signatures signify that both parties agree to the terms of the bill of exchange. If the bill of exchange is not signed it will be incomplete and infective and none of the parties can legally enforce the bill.

4. Must Not be Vague: The conditions and language of the bill of exchange shall not be vague and the conditions or period mentioned must be proper if terms of the bill of exchange are vague or indefinite which cannot be ascertained with reasonable certainty of the intention of the parties, then bill of exchange is not enforceable by law.

5. Parties in a Bill of Exchange Transaction Must be Certain: Parties in a bill of exchange transaction may not always be three different parties, one can play the role of two different parties but there must be two different parties in any case. Also as per RBI guidelines, a bill of exchange can’t be made payable to bearer on demand.

Types of Bills of Exchange

1. Bills of Exchange Payable after a Certain Time Period: These bills of exchange are also named term draft, they are to be clear after maturity of certain time limit which was agreed between both parties, time limit is also mentioned on the face of the bill as well.

2. Bill of Exchange Payable on Sight: These bills of exchange are also called bills payable on demand. The creditor is required to discharge his liabilities as and when the drawer presents the bill to the creditor. Under the bill of exchange payable on sight there is no maturity date rather it is on the drawer when he demands payment against the bill.

3. Accommodation Bill: A bill of exchange that is drawn or endorsed without any condition or restriction is called an accommodation bill. These bills are generally drawn for mutual help and no transaction is involved in this bill and is done for financial arrangement between two parties.

4. Trade Bill: These bills are used only for trade. Where the purpose of drawing a bill of exchange is to accept and settle a trade transaction, it is called a Trade bill. This bill of exchange is drawn by the seller of the goods and is accepted by the buyer of the goods. These are done to settle any credit purchase.

5. Documentary Bill: A bill of exchange that is supported by documents that confirm the authenticity of trade or transaction that has taken place between the creditor and the seller is called a documentary bill. The documents may comprise invoices, order copies, receipts, bills of lading, railway bills, etc.

6. Usance Bill: Usance bill is also termed a time bound bill because it specifically mentions the time period and the due date under which the creditor is required to discharge his payment liabilities and they are also called time bills. Time bills are used with high frequency in the trade of perishable goods and case of valuable stock.

7. Inland Bill: A Bill of exchange that is drawn in India and is payable only in India. These bills are payable only in India. The inland bill is just the opposite of the Foreign bill. There can be three cases of inland bill namely the bill drawn in India and paid in India, the bill drawn in India and drawn upon a person resident in India, whether payable in India or outside India, and the bill drawn in India on a person residing outside India but payable in India.

8. Foreign Bill: A bill of exchange that is payable outside India is called a foreign bill. Bills that are not inland are foreign bills. Foreign bill has two major bifurcations which are export bills and import bills. There can be four associated instances of foreign bill namely a bill drawn outside India and made payable outside India, a bill drawn outside India and made payable in India, a bill drawn outside India on any person residing outside India, a bill drawn outside India on a person residing in India.

9. Supply Bill: A supply bill is a type of bill that is drawn to supply certain goods by any government department by a supplier or by a contractor to obtain cash for any pending payments from any financial institution for satisfying the financial requirements, supply bills are primarily used. They are also seen as a trusted and fast way to facilitate trade as they are used by the government.