Bill of exchange is a written order signed by the party drawing it, which directs a second party to pay to a third party a fixed sum of money at a certain time. The word party may refer to an individual, a bank, or a corporation. The party that orders the bill of exchange is called the maker, or drawer, of the bill. The second party is the drawee, and the third party is the payee. Sometimes the drawer of the bill may order that payment be made to the drawer.
A bill payable on receipt is called a sight or demand bill or a check. A bill payable at a specified future time is called a time bill. This type of bill is presented to the drawee. When accepted, the bill becomes an acceptance. The drawee is then legally required to pay the payee the amount shown on the bill.
Bills of exchange are often used to finance the movement of goods within a country or between one country and another. To take title to the goods, the drawee must pay the amount specified in the bill. The drawee must pay immediately if it is a sight bill. If it is a time bill, the drawee can accept it and pay later.
Bills drawn on bankers are called banker’s bills. Bills arising out of financial transactions between bankers are called finance bills, and those on merchants, mercantile bills. Those relating to commercial or nonfinancial transactions are called trade bills.
Technically, a bill of exchange and a draft are the same. But the term draft usually means an order to transfer money between people of the same country. Exchange also refers to the relative values of the moneys of two countries.
