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Difference between Promissory Notes and Bills of Exchange

A commitment to pay a certain sum of money to the bearer/assignee at a specific time or upon demand is contained in a signed document known as a "negotiable instrument." These devices can be transferred, allowing the individual or organization to use them as best suits their needs.

There are three categories of negotiating instruments: bills of exchange, cheques, and promissory notes.

In this article, the terms "promissory note" and "promissory note" will be defined briefly, along with some of their key differences.

Difference between Promissory Notes and Bills of Exchange

Promissory Note

A promissory note is an official document that a person or business entity issues pledging to pay money. The payments may be sent on a regular or one-time basis and may be made in letter form or other writing. A promissory note is typically used to protect a loan and specifies the time frame for repayment of the principal plus interest. Typically, promissory notes are protected by collateral, such as a mortgage or a purchase agreement. However, cheques are not backed by any collateral; rather, they are a bank's assurance that, if you follow all the procedures and specific conditions for issuing a cheque from the bank, it will give you as requested.

These characteristics describe them.

  • The most crucial aspect of a promissory note is that the creditor does not have to accept it once the debtor has drawn it.
  • Written promises to pay back a creditor.
  • The promisor or drawer must sign the document.
  • The payment date has been set in advance.
  • Agreement between the promisee and the promisor to pay a specific amount of money.
  • Settlement is made in the applicable nation's lawful currency.
  • It involves the two parties listed below:

Drawer/Maker: The debtor who guarantees to give its creditor a particular amount in payment.

Drawee: The creditor who has been promised a specified amount of money on a fixed date is known as the drawee.

Uses of Promissory Note

Loans are frequently secured with promissory notes. In the event of default, it is also applied to repay any loans or money borrowed. The recipient uses a promissory note to declare that they will repay a certain sum by a given date. If the beneficiary defaults, the holder of the promissory note, such as a bank, may take legal action against the debtor and pursue recovery of the money through the court system. A promissory note is also given out when buying real estate; this is done to show that the loan will be repaid within the predetermined time frame.

Bills of Exchange

A bill of exchange, a written note that is legally binding and has been officially stamped & signed by its drawer, is also a negotiable instrument. It directs the payout of a certain amount of money to the bearer of this instrument either immediately upon demand or within a predetermined period. These are often used as payment for goods & services, and the debtor must accept them as valid.

It possesses the characteristics listed below.

  • It has to be appropriately dated.
  • Contains a payment schedule.
  • The drawer's or maker's signature is required.
  • A drawee must accept the bill.
  • It is important to provide the payment order and the amount.
  • It must be given to the right payee.
  • There are three parties involved:

Drawer: The person who receives the money is the instrument's issuer.

Drawee: The person who must pay the required sum. The payee, who is typically similar to the drawer, is the person who receives money.

Uses of a Bill of Exchange

This method is used to transfer funds from one location to another without identifying the recipient. To prevent fraud or loss, a bank issues it. This document is used in cross-border and international transactions, even local transactions, if the parties agree. Various uses for bills of exchange include: -

  • Paying for products or services obtained from a foreign nation or individual through an export or import business.
  • Often, a BOE is used when someone transfers property to effectuate a property transfer.
  • Raise capital by offering finance as collateral for the loan amount.

Individuals can use bills of exchange to transmit money abroad because the sender's name cannot be easily identified.

How do Promissory Notes and Bills of Exchange Differ?

Promissory notes, bills of exchange, and cheques have certain similarities but differ significantly. These have various qualities and objectives despite being financial products with a written guarantee for payment, which every student of commerce must comprehend.

Below is a detailed summary of all the differences between a BOE and a promissory note.

Basis Promissory Note Bills of Exchange
Define A negotiable instrument that the debtor issues contain a written commitment to pay the credit a certain amount within a certain time frame or upon demand. A negotiable instrument that directs the debtor to give the creditor a particular amount of money on demand or by a given date.
Issued by These are issued by the debtor and include their stamp and signature, the due date, and the agreed-upon sum. Creditors issue these, which include their stamp and signature, as well as a specified payment date and a fixed sum.
Involved Parties There are two parties: a drawer and a payee. There are three parties: a drawer, a drawee, and a payee. Usually, the drawer and payee are the same under specific circumstances.
Acceptance The drawee is not compelled to accept. Payment cannot be made until the drawee has accepted the bill of exchange.
Liability The drawer's liability is both primary and complete. The drawer's liability is secondary & conditional
Instrument dishonoring If the instrument is dishonored, the drawer receives no notice. All parties engaged in the transaction were notified that the instrument had been dishonored.
Copies Copies are not permitted under the promissory note. Copies are permitted for bills of exchange.
Payable Entity The drawer and payee cannot be the same individual. The same individual can be both the drawer and the payee.

Key Differences

As you know, there are several differentiations between promissory notes and bills of exchange. The following are a few of the most obvious differences between them:

  • When the debtor is mandated to give the creditor the money they are owed within a specific time frame, a bill of exchange, which is a negotiable instrument, is issued. Contrarily, a promissory note is a written contract where the drawer promises to pay the drawee a certain amount within a predetermined period of time.
  • The persons involved in a BOE are the drawer, the drawee, and the payee. In a promissory note, there are two parties: the drawer and the payee/drawee.
  • A BOE must be accepted by the debtor in order to be considered legal. In the event of a promissory note, the drawee's acceptance is not necessary.
  • If the BOE is not adhered to, a notification is given to all parties involved. In this situation, a promissory note's "maker" is not given notice of dishonor.
  • In the case of bills of exchange, no asset is kept as security. Assets may serve as collateral for loans in specific circumstances, such as those involving promissory notes.
  • Money can be sent to anybody in a Bill of Exchange, but it cannot be sent to an unidentified recipient in a Promissory Note.

The Conclusion

As a result, we can conclude that a bank issues a bill of exchange, whereas an individual or business issues a promissory note. They cannot be substituted for one another since they provide diverse functions, purposes, and uses. Both are very safe tools when utilized for their intended function.

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