Bill of Exchange vs Promissory Note: Difference and Comparison (2024)

A bill of exchange is a negotiable instrument used in trade transactions that orders one party to pay a specified sum of money to another party at a predetermined future date. In comparison, a promissory note is a written promise from one party to pay a specific amount of money to another party on a specified date or on demand.

Key Takeaways

1. A Bill of exchange is a written order from one person (drawer) to another (drawee) to pay a specified sum of money to a third party (payee) on a selected date or demand.
2. A promissory note is a written promise from one person (maker) to pay a specified sum of money to another person (payee) on a selected date or demand.
3. A Bill of exchange involves three parties (drawer, drawee, and payee), while a promissory note involves two parties (maker and payee).

Bill of Exchange vs Promissory Note

A bill of exchange is issued by the creditor and a Promissory Note is issued by the Debtor. In the former, 3 parties are involved i.e., drawer, drawee and payee, in the latter 2 parties are involved i.e., a drawer and the payee. In the former, liability of the drawer is primary unlike the latter.

Comparison Table

What is Bill of Exchange?

A Bill of Exchange (BoE) is a formal written document used in financial transactions to promise or order the payment of a specific sum of money at a specific date. It is considered a highly negotiable instrument and is crucial in facilitating international trade and financing activities.

Key features of a Bill of Exchange:

• Three parties involved:
  • Drawer:The person who creates and issues the BoE,instructing the payment.
  • Drawee:The person who is ordered to pay the specified sum.
  • Payee:The person who is entitled to receive the payment.
• Unconditional order to pay:The drawee must pay the specified sum to the payee on the due date.
• Negotiability:The BoE can be transferred to other parties through endorsem*nt,allowing for flexibility in payment arrangements.
• Formal format:The BoE needs to adhere to specific legal requirements and include essential details like the parties involved,amount due,due date,and drawer’s signature.

Types of Bills of Exchange:

• Trade draft:Used in international trade to secure payment for goods shipped.
• Bank draft:Issued by a bank on behalf of a customer to guarantee payment to another party.
• Sight draft:Requires immediate payment upon presentation.
• Time draft:Specifies a future date for payment.
• Domiciled bill:Specifies a specific location for payment.

Benefits of using Bills of Exchange:

• Security and reliability:Guarantees payment by creating a legally binding obligation for the drawee.
• Flexibility:Can be customized to meet the specific needs of the transaction.
• Negotiability:Facilitates easy transfer of payment rights to other parties.
• Cost-effective:Provides a relatively low-cost method of securing payment compared to other options like letters of credit.

What is Promissory Note?

A Promissory Note (PN) is a written promise by one party (the maker) to pay a certain sum of money to another party (the payee) at a specified date or on demand. It is a legal document that defines a debt obligation and serves various purposes in financial transactions.

Key features of a Promissory Note:

• Two parties involved:
  • Maker:The borrower who signs the note and promises to repay the loan.
  • Payee:The lender who receives the note and is entitled to the payment.
• Conditional promise to pay:Unlike a Bill of Exchange,the maker may be subject to certain conditions before fulfilling the payment obligation.
• Less negotiable than Bills of Exchange:Transferring ownership of a PN might require specific procedures and may not be as readily accepted by third parties.
• Flexible format:The format of a PN can be customized to suit the specific needs of the parties involved and may not require strict adherence to legal formalities like BoE.

Types of Promissory Notes:

• Demand note:Payable on the demand of the payee.
• Term note:Specifies a future date for payment.
• Secured note:Backed by collateral,such as property or assets.
• Unsecured note:Not backed by collateral and relies solely on the maker’s promise to repay.

Benefits of using Promissory Notes:

• Simple and straightforward:Easy to understand and implement for both parties involved.
• Flexible and adaptable:Can be customized to different loan terms and repayment schedules.
• Cost-effective:Less expensive to prepare and manage compared to formal loan agreements.
• Personal touch:Provides a personalized approach to loan agreements between individuals or small businesses.

Overall, Promissory Notes play a crucial

Main Differences Between Bill of Exchange and Promissory Note

1. Parties Involved:
   • Bill of Exchange: In a bill of exchange, there are three parties involved: the drawer (who orders the payment), the drawee (who is directed to make the payment), and the payee (who receives the payment).
   • Promissory Note: In a promissory note, only two parties are involved: the maker (who promises to pay) and the payee (who receives the payment).
2. Nature of Instrument:
   • Bill of Exchange: A bill of exchange is primarily an order for payment and is used in trade and business transactions to request the drawee to pay the payee.
   • Promissory Note: A promissory note is a direct promise by the maker to pay a specified sum of money to the payee and is used for various types of loans, debt arrangements, or personal agreements.
3. Payment Direction:
   • Bill of Exchange: The bill of exchange contains an order from the drawer to the drawee to pay the payee on a specified future date or upon presentation.
   • Promissory Note: The promissory note includes a direct promise by the maker to pay the specified amount to the payee on a specified future date or upon demand.
4. Acceptance Requirement:
   • Bill of Exchange: Bills of exchange may require acceptance by the drawee, indicating their willingness to make the payment as instructed.
   • Promissory Note: Promissory notes do not require acceptance since they are already a direct promise to pay by the maker.
5. Usage and Context:
   • Bill of Exchange: Bills of exchange are commonly used in commercial and international trade transactions to facilitate payments and financing arrangements.
   • Promissory Note: Promissory notes are used for personal loans, financial transactions, or for individuals and businesses to formalize debt obligations.
6. Negotiability:
   • Bill of Exchange: Bills of exchange are negotiable instruments, meaning they can be transferred to third parties, who then become entitled to the payment.
   • Promissory Note: Promissory notes can also be negotiable, but their negotiability depends on specific legal requirements and the terms specified in the note.

References

1. https://albertalawreview.com/index.php/ALR/article/download/1893/1882/
2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/ibl4&section=26

Last Updated : 11 December, 2023