What is a bill of exchange and what is it for?

A bill of exchange can be used as a credit instrument in commercial operations. It is a document with legal force to guarantee the payment obligations. In addition, it presents another series of advantages, such as the possibility of being transferred or including a guarantor.

In this article we show you the characteristics and details of this exchange title, so that you can manage it effectively.

What is a letter of change?

We can define a bill of exchange as a commercial document that incorporates the order of a person (called the drawer) to another person (called the drawee) to pay a third party (called the payee) a certain amount, upon presentation of the document or on a date future..

It is a title-value (a document that includes a right and is transmittable) regulated by the Exchange and Check Law (Law 19/1985).

As you can see, a bill of exchange is based on a payment obligation and involved 3 people (physical or legal)). The drawer and the taker of a bill of exchange may coincide. However, what defines a bill of exchange is that there are 3 main legal positions.

Besides of drawer, drawee and taker (or holder of a bill of exchange), other figures may also appear, such as guarantor, endorser and endorsee.

What are the parts of a bill of exchange?

There are several models of bill of exchange, since it is not required to be written in a specific format. However, for this document to be considered as such and to be regulated by the aforementioned Foreign Exchange and Check Law, it must comply with a series of formal requirements.

Specifically, a bill of exchange must contain the following essential elements:

• The denomination of "Bill of Exchange" inserted in the title of the document and in the same language in which it is written.
• Mandate to pay a certain amount of money, expressed in letters and numbers.
• Name of the person who has to pay this amount. That is, the freed.
• Name of the person to whom the payment is to be made. That is, the policyholder or beneficiary. It is also called a holder of a bill of exchange.
• Place and date of issuance of the bill of exchange.
• Signature of the drawer.

On the other hand, there are some parts of a bill of exchange that are not essential, but may be present:

• He expiration of the bill of exchange: the expiration date is important because it indicates when the bill of exchange can be presented for collection. If no expiration date is stated, it is understood that it is payable on demand (at the time of presentation).
• He place of payment: when a place for the payment of the bill of exchange is not inserted, it will be assumed that it will be the one that appears next to the name of the drawer or drawer of the bill of exchange.
• He place of issue: Failing to specify a place where the bill of exchange is drawn, it will be assumed that it is the one that appears next to the name of the drawer, who is the one who issues the bill of exchange.

Acceptance of the bill of exchange

Now is when the question arises as to why the signature of the drawee is not necessary for the issuance of a bill of exchange.

Although formally it is not an essential requirement, the signature of the drawee may also appear and implies acceptance of a bill of exchange (along with the word "I accept" or another equivalent, on the front of the document). In practice, the acceptance of the bill of exchange is usually essential.

When the drawee accepts the bill, he unconditionally declares that he is the principal obligee and the commitment to pay the amount. According to the Exchange and Check Law (article 11), if the bill is not accepted, the drawer is the one who assumes the payment guarantee.

In principle, the presentation of the letter to be accepted is voluntary, except in the following cases:

• That the drawer establishes the obligation to be accepted (may even prohibit acceptance or determine that it cannot be submitted for acceptance before a certain period).
• Bills drawn for a period from the hearing must be accepted.

The drawee may accept all or part of the amount. In the latter case, it is necessary to include the amount accepted in the space reserved for this purpose.

It is the policyholder who must present the bill for acceptance. If it is mandatory to accept it and the drawee refuses, legal actions can be taken regulated in the Exchange and Check Law (the protest for non-acceptance).

What are the functions of a bill of exchange?

The bill of exchange is a useful and necessary instrument for commercial traffic. Facilitates economic transactions and offers legal guarantees. Specifically, it complies with the following functions:

• It serves as payment method: It is a transferable title-value that can be exchanged for goods and services, just like liquid money itself.
• Act like credit instrument: as it can be issued with a maturity after its issuance, the bill of exchange can be used to finance purchases. Through various bills of exchange, you can pay for the acquisition of assets in different terms.
• It's a financial asset: the taker or holder of a bill of exchange has the option of obtaining the amount before maturity through the commercial discount.
• It's about a executive title: the mechanisms for acting before the courts in the event of non-payment are quick and present greater severity.

Is a bill of exchange the same as a promissory note?

Although they comply with similar functions, differences exist between a bill of exchange and a promissory note.

The pay is a "payment promise”, while the bill of exchange is a “payment mandate”. Thus, the first difference is found in who issues the title and, consequently, who takes the initiative.

Being a promise, the promissory note is issued by the debtor himself. In the case of the bill of exchange, it is issued by the creditor.

Another difference that presents a bill of exchange with respect to a promissory note is found in that the drawer is obliged to pay a stamp (stamp issued by the State to give legal validity to the documents).

Furthermore, as we have mentioned, in the bill of exchange exist 3 participants (the drawer, the drawee and the holder) and in a I will pay there is only place for 2 legal positions.

In any case, if you have doubts about which exchange title or credit instrument may be more convenient for a certain commercial operation or how to reflect a bill of exchange in your accounting, you can count on the financial advisory services what we offer you from Alter Finance.