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Bills of Exchange |
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The function of the Bill of Exchange in International Trade:
The Bill of Exchange performs many functions in international trade including:
- Facilitates the granting of trade credit in a legal format by
permitting payments on agreed future dates.
- Provides formal evidence of the demand for payment from a seller to
a buyer.
- Provides the seller with access to finance by permitting them to
transfer their debts to a bank or other financier by merely endorsing the Bill
of Exchange to that bank or financier.
- Permits the banker or financier to retain a valid legal claim on
both the buyer and the seller. In certain circumstances a bank or financier may
have a stronger legal claim under a Bill than the party that sold them the
debt.
- Permits a seller to obtain greater security over the payment by
enabling a bank to guarantee a drawee's acceptance (guarantee to pay on the due
date) by signing or endorsing the Bill. (See Guaranteed Bills of Exchange
below)
- Allows a seller protect their access to the legal system in the
event of problems, while providing easier access to that legal system.
How the Bill of Exchange is used in international trade:
A Bill of Exchange can either be payable immediately or at some future date.
- If a Bill is payable immediately, it is usually issued payable at
sight. The term "at sight" means that a buyer should pay once they have sighted
the Bill, that is once the demand for payment has been made.
- If a Bill is payable at some future date, it must facilitate the
calculation of the actual due date. For example Bills of Exchange may be drawn
payable at 60 days sight, at 60 days from Bill of Lading Date etc.
Banks should be used as agents for the collection of the Bill. Visit our
section on Documentary Collections in the Products and Services or Product
Diagrams area of this website for further details.
Guaranteed Bills of Exchange:
To provide greater payment security a seller may look to have a Bill of
Exchange guaranteed by a buyer's bank. A guaranteed Bill of Exchange is one
drawn on and accepted by the buyer and to which, the buyer's bank has added its
guarantee that the Bill will be paid at maturity. The security to a seller
comes from a bank giving an undertaking to effect payment on a certain date
regardless of the financial standing of a buyer on that date.
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