Bill of Exchange
A bill of exchange is a promise to pay a trade debt.
Instead of issuing an invoice a company issues a bill of exchange instead which has a legal aspect and requires the customer to acknowledge the bill by signing it.
If the customer "promises to pay" it is known as a promissory note
Corporates selling on a short-term trade debt (trade bills or elible bills)
The term accepting this is putting the banks signature on a bill of exchange to give it better credit quality.
What is the exporter cannot wait 3 months but needs the money earlier to fund cash flow ?
The exporter can visit their bank and ask for a loan (showing them the trade bill to prove to the bank that cash is on its way)
Alternatively the exporter can sell the bill to the bank.
The bank is asked to put up the money now and collect it in 3 months.
The bank will have to consider the risk involved and the cost of money (ie interest) before agreeing on how much money to lend.
The bill will therefore be sold at a discount and this process is known as "discounting the bill"
The problem with this is to know how credit worthy the importer is.
This is another way in which a corporate might raise short term is by selling on a short term trade debt.
The seller draws up a bill promising to pay them for the goods supplied in say 3 months time and asks for a buyer to sign it. This is a bill of exchange.
Bills of exchange are used extensively in the UK, quite widely used in Europe and very little in the US.
If the bank is one of the central banks listed for this purpose, the bill is a "bank" bill Others called "trade bills" The bill is frequenlty sold at a discount.
This is drawn by the exporter on the importer, with the importer agreeing to pay on demand at a determinable future time the value of the goods to a person or bearer of tbe bill
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