Difference between Bills of Exchange and Promissory Note

This article will briefly define Bill of Exchange and Promissory Note and will highlight the key differences between them. A promissory note is that monetary instrument wherein the maker, in writing, promises to pay at a specified date or on demand a certain sum of money payable to the payee. They are generally used in loan transactions wherein one of the parties requires borrowing funds or credit. They thus become legally binding and are considered proof of the debt between the two parties.

1. This article will briefly define Bill of Exchange and Promissory Note and will highlight the key differences between them.
2. In the context of business financing, a promissory note can be a flexible and straightforward way to secure funding.
3. Endorsement is when the person who issued the bill (the drawer) gives their right to receive payment to someone else.
4. No, a promissory note does not require acceptance from the payee as it is a direct promise from the maker to pay.

Users shall be the sole owner of the decision taken, if any, about suitability of the same. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. Car Supply XYZ draws a bill of exchange, becoming the drawer and payee in this case. The bill of exchange stipulates that Company ABC will pay Car Supply XYZ $25,000 in 90 days.

Do more with the Bajaj Finserv App!

It is a good idea to check with the relevant authorities or institutions for any specific requirements or limitations. Understanding the distinction between a bill of exchange and a promissory note is not just a matter of academic interest but a practical necessity for anyone in the field of business and finance. Whether you are a business owner considering a Business Loan or a finance professional, a thorough understanding of these instruments can aid in better financial decision-making and management.

Before delving into their differences, it’s essential to understand what these terms mean individually. A promissory note is a financial document in which one party promises in writing to pay a determinate sum of money to another party either at a fixed or determinable future time or on demand of the payee, under specific terms. It’s a common instrument used in many financial transactions, including personal loans and business financing.

The buyer or seller typically employs a bank to issue the bill of exchange due to the risks involved with international transactions. Promissory notes are similar to bills of exchange in that they, too, are a financial instrument that is a difference between bills of exchange and promissory note written promise by one party to pay another party. They are debt notes that provide financing for either a company or an individual from a source other than a traditional lender, most commonly one of the parties in a sales transaction. 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.

Bills of exchange help facilitate the process of international trade by stipulating payment from one party to another at a specified date. They function similarly to a check and though not a contract, can be used to fulfill the terms of a contract. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for payment.

1. To explore more about business loans, you can visit Tata Capital’s Business Loan page for detailed information.
2. For example, a promissory note may be used in combination with a mortgage, in which case it is called a mortgage note.
3. Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender.
4. The bill of exchange stipulates that Company ABC will pay Car Supply XYZ $25,000 in 90 days.
5. While a bill of exchange is not a contract itself, the involved parties can use it and the attached forms to fulfill the terms of a contract.
6. Promissory note is a written promise that may be in the form of a letter, a writing or an electronic transmission.

Difference between Bill of Exchange and Promissory Notes

Leverage a business loan to support your financial needs and drive growth effortlessly. (2) An instrument in the form of a note payable to maker’s order is not a note within the meaning of this section unless and until it is indorsed by the maker. In case of Promissory Note, the payer, payee and beneficiary cannot be traced as it is an anonymous check as per banking terms; however, in case of Bill of Exchange, sender and beneficiary can be found easily. Yes, you can;  you can send money to an unknown beneficiary in case of Promissory Note.

Use of Promissory Notes

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.

In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid insolvency. In the United States, a promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes called mortgage notes are used extensively in combination with mortgages in the financing of real estate transactions. One prominent example is the Fannie Mae model standard form contract Multistate Fixed-Rate Note 3200, which is publicly available.39 Promissory notes, or commercial papers, are also issued to provide capital to businesses. However, promissory notes act as a source of finance to the company’s creditors.

Key Takeaways

The difference between a promissory note and a bill of exchange is that the latter is transferable and can bind one party to pay a third party that was not involved in its creation. A bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within a given period of time. The promissory note, on the other hand, is issued by the debtor and is a promise to pay a particular amount of money in a given period.