what is a bill of exchange 
a bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date bills of exchange are similar to checks and promissory notes they can be drawn by individuals or banks and are generally transferable by endorsements investopedia laura porterunderstanding bills of exchangea bill of exchange transaction can involve up to three parties the drawee is the party that pays the sum specified by the bill of exchange the payee is the one who receives that sum the drawer is the party that obliges the drawee to pay the payee the drawer and the payee are the same entity unless the drawer transfers the bill of exchange to a third party payee unlike a check however a bill of exchange is a written document outlining a debtor s indebtedness to a creditor it s frequently used in international trade to pay for goods or services while a bill of exchange is not a contract itself the involved parties can use it and the attached forms to fulfill the terms of a contract it can specify that payment is due on demand or at a specified future date the period between billing and payment is called the usance it s often extended with credit terms such as 90 days as well a bill of exchange must be accepted by the drawee to be valid bills of exchange generally do not pay interest making them in essence post dated checks they may accrue interest if not paid by a certain date however in this case the rate must be specified on the instrument they can conversely be transferred at a discount before the date specified for payment a bill of exchange must clearly detail the amount of money the date and the parties involved including the drawer and drawee if a bill of exchange is issued by a bank it can be referred to as a bank draft the issuing bank guarantees payment on the transaction if bills of exchange are issued by individuals they can be referred to as trade drafts bills of exchange are useful in international trade because they help buyers and sellers deal with the risks associated with exchange rate fluctuations and differences in legal jurisdictions if the funds are to be paid immediately or on demand the bill of exchange is known as a sight draft in international trade a sight draft allows an exporter to hold title to the exported goods until the importer takes delivery and immediately pays for them however if the funds are to be paid at a set date in the future it is known as a time draft a time draft gives the importer a short amount of time to pay the exporter for the goods after receiving them the difference between a promissory note and a bill of exchange is that the latter is transferable and can bind one party to pay a third party that was not involved in its creation banknotes are common forms of promissory notes a bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within a given period of time the promissory note on the other hand is issued by the debtor and is a promise to pay a particular amount of money in a given period example of a bill of exchangesay company abc purchases auto parts from car supply xyz for 25 000 car supply xyz draws a bill of exchange becoming the drawer and payee in this case the bill of exchange stipulates that company abc will pay car supply xyz 25 000 in 90 days company abc becomes the drawee and accepts the bill of exchange and the goods are shipped in 90 days car supply xyz will present the bill of exchange to company abc for payment the bill of exchange was an acknowledgment created by car supply xyz which was also the creditor in this case to show the indebtedness of company abc the debtor 