Bills of Exchange

Financing Options with Bills of Exchange

The ability to negotiate or discount Bills of Exchange can be an extremely important source of finance in international trade. The Bill of Exchange can provide easier access to financing because it enables the financing bank to retain a claim on all parties to the Bill. In addition parties that finance Bills of Exchange can, in certain circumstances, obtain stronger rights than the party transferring the Bill to them. Bill discounting may provide access to finance rates lower than the overdraft or loan rate the seller could normally obtain.

Negotiation Facilities:

The negotiation of a Bill is the transfer of the rights under a Bill from one party to another for value. Some banks will negotiate Bills for a customer by purchasing Bills from them for value. For example, the bank will advance 75% of the face value of the Bill and upon receipt of the proceeds will clear the advance together with any accrued interest on the advance. Negotiation facilities can be used to finance Bills payable at sight or Bills payable at a future date even before they have been accepted. Negotiation facilities are normally granted with full recourse to the seller.

Bills Discounting with recourse:

Discounting of a Bill of Exchange can only occur once the Bill has a definite maturity date in the future and the buyer has accepted it. Discounting differs from negotiation in that the bank will calculate the net present value of the face value of the Bill utilising a cost of funds interest rate and a margin. The net amount so calculated is then advanced to the seller. Upon receipt of the proceeds from the buyer at maturity, the bank will clear its Bills discounted account. This finance is provided with recourse to the seller by the bank.

Bills Discounting without recourse:

Similar to with recourse Bills Discounting, except that the financing bank will waive its rights of recourse to the seller. This can occur when the Bill is guaranteed by another bank, or where the buyer has a very strong credit standing or rating.

N.B. All financing facilities will be subject to credit approval by the financing bank.

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