Although both Bill of exchange and Promissory Note is the negotiable instruments which facilitate the exporter and importer (buyer/ supplier) during a business deal yet there are few key differences which you need to clarify.
The major hurdle is the trustworthiness of either party while entering any contract of international or domestic trade (purchase or sales of goods and services). There must be an assurance to meet the contractual or financial obligations of a buyer or supplier within a stipulated period of time. In this circumstance, these financial instruments play a vital role between creditor and debtor.
Bill of Exchange Definition:
A Bill of Exchange is a written financial document that contains an unconditional order of payment of a specified amount of funds within a stipulated period of time to the creditor or bearer of the document. It is issued by the creditor/ supplier in the favour of debtor/ buyer.
Promissory Note Definition:
A Promissory Note is a written financial undertaking promising (unconditional) to pay a specific sum of money on or before a certain period of time to the creditor/ seller or any third party endorsed by the creditor. It is issued by the debtor in favour of the creditor.
Bill of Exchange vs Promissory Notes (Comparison Chart):
Difference between bill of exchange and promissory notes:
A bill of exchange possesses an order/ demand to the specified amount, on the other hand, promissory notes possess a promise to pay the amount.
2) Drawer/ Issuer (Who issues?):
The bill of exchange is drawn/issued by the creditor/ supplier whereas promissory notes are issued by the debtor/ buyer.
3) Is acceptance required?
A bill of exchange requires acceptance from the debtor while in case of promissory notes acceptance of debtor is not required as it is issued by the debtor itself.
4) Can a duplicate copy be issued?
The other copies of the bill of exchange can be issued whereas the duplicate copy of promissory notes can neither be issued nor it is valid.
5) When is it used?
Though both are typically used during cross border transactions and domestic trading of any goods or services, promissory notes are also been used in borrowing or lending between two parties as it is written undertaking on the behalf of debtor itself, promising to pay the said amount on a stipulated date.
6) How many parties are involved?
There are three parties (drawer, drawee, payee) involved under a bill of exchange whereas in case of promissory notes only two parties (drawer, payee) are involved.
7) What happens if dishonoured?
If a bill of exchange is dishonoured each party involved will be notified, on the other hand, the only issuer will be notified when the promissory note is dishonoured.
Thus we can conclude that both are negotiable instruments under India’s Negotiable Instruments Act 1881. The promissory notes are frequently used during loans, advances and business transactions to reduce the risk of default and bill of exchange typically used during local and cross-border transactions such as sale or purchase of goods or services.
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