Bill of Exchange and Promissory Note are two types of instruments that are generally used by banks to carry out their business. Promissory note is a written promise that may be in the form of a letter, a writing or an electronic transmission. A Bill of Exchange is usually similar to a promissory note but in this, only written promise to pay money is made; it is issued by a bank and not by any individual. This article will briefly define Bill of Exchange and Promissory Note and will highlight the key differences between them.
What is the Bill of Exchange?
Bill of Exchange is an instrument that is used by a bank or merchant to pay money in a hazy or untraced way. In regular banking and financial circles, a bill of exchange is also known as a letter of credit. The application form for this instrument tells the bank or merchant details such as the name and address of the beneficiary, amount payable, date of issue and validation etc. When this instrument is issued by a bank it becomes like a check or promissory note whereas when it is issued by any individual it becomes a check instead of a promissory note.
Use of Bill of Exchange
This instrument is used to pay money from one place to another so that the beneficiary cannot be traced. It is issued by a bank in order to avoid any fraud or loss. This instrument is used in international and inter-country transactions and even domestic transactions may use it if the parties agree to that.
Bill of Exchange can be used for various purposes:
– To pay for goods or services purchased from a foreign country or person through their import or export business
– To execute property transfer; when an individual transfers property then bill of exchange is generally used
– To raise funds by pledging financing as security for the loan amount
When individuals send money abroad then the bill of exchange can be used because its sender name cannot be traced easily.
What is a Promissory Note?
Promissory note is a written promise to pay money issued by an individual or corporate body. It may be in the form of a letter or a writing and the payments can be done on a recurring or one off basis. Promissory note is generally used to secure a loan, it also gives a time period for the borrower to repay the loan amount with interest. Promissory notes are usually secured through collateral such as Mortgage, Hire Purchase etc. But checks are not secured through any collateral; they are a bank’s guarantee that it will pay you as per your request if you meet all the formalities and particular requirements of issuing a check from the bank.
Use of Promissory Notes
Promissory notes are commonly used to secure loans. It is also used to pay back any loan or money borrowed in case of default. Promissory note is used by the beneficiary to state that he/she will pay back a particular amount at a specified date. In case of default by the beneficiary, a bank or individual holding a promissory note can file for legal action against debtors and through court process can claim money from him/her. Promissory note is also issued during real estate purchase where it is seen as a proof that loan amount will be paid to the seller within an agreed time frame.
Difference between Bill of Exchange and Promissory Notes
Bill of Exchange is issued by a bank whereas the Promissory Notes are issued by an individual or a corporate body and no bank or person has any role in its issue. In the case of a Promissory Note, the payer and payee cannot be traced/found anywhere; it is like an anonymous check so that the beneficiary cannot be found or held responsible for non-payment. In case of bill of exchange, it is not anonymous but you can trace its sender i.e. a bank as he is the maker of that instrument. Some other key differences are:
1) Bill of Exchange can be issued by a bank whereas Promissory Note is issued by an individual
2) Bill of exchange is secured through collateral whereas Promissory Note is not secured through any collateral
3) Bill of Exchange can be used for international transaction whereas Promissory Note is not used for international transaction
4) In case of Bill of Exchange, payer and payee cannot be traced but in case of Promissory Notes, the beneficiary can be traceable
5) If you need to take a loan from a bank then the bank will ask you to give a Letter of Undertaking but if you have a promissory note then no such procedure will be followed as a promissory note is more secure.
6) Bill of Exchange serves as a legal proof that payment will be made in case of default by the payer whereas no such proof is needed in case of Promissory Note.
7) Promissory notes are written in the form of a letter or writing where the Bill of Exchange is not.
8) In the case of a bank, you can use a bill of exchange to raise funds as collateral whereas in the case of an individual, you cannot do that.
9) In the Bill of Exchange, you can send money to anyone but in the Promissory Note, you cannot send money to an unknown beneficiary.
In conclusion we can say that a Bill of Exchange is issued by a bank whereas a Promissory Note is issued by an individual/firm. They both have different purposes, uses and functions; they cannot be used in place of one another. Both are quite secure instruments used for their specific purpose.