‘Sahil owe to Sameer ₹1,20,000’. Is it a bill of exchange or promissory note? Explain
Answers
Answer:
BUSINESS BUSINESS ESSENTIALS
Bills of Exchange vs. Promissory Notes: What's the Difference?
By
J.B. MAVERICK
Updated May 28, 2021
Fact checked by
SUZANNE KVILHAUG
Bills of Exchange vs. Promissory Notes: An Overview
Bills of exchange and promissory notes are written commitments between two parties that confirm a financial transaction has been agreed upon. Bills of exchange are more often used in international trade, whereas promissory notes are used most often in domestic trade.
KEY TAKEAWAYS
Bills of exchange and promissory notes are two types of financial instruments used to confirm a deal has been struck.
Both financial instruments are written commitments between a buyer and seller, or any other parties that are agreeing to a financial transaction.
Bills of exchange are documents that show a buyer has agreed to pay a seller a specific amount to be paid at an agreed-upon point in time.
The parties usually bring in a bank to issue the bill of exchange, due to the risks that come with international transactions; as such, the bill is also known as a bank draft.
Promissory notes are debt notes that provide financing to individuals or corporations from a non-traditional lender, such as one of the parties involved in a sale.1
Promissory notes have in the past mostly been used by only corporations or high-net-worth investors, but have recently been used more often in real estate transactions.2
Bills of Exchange
A bill of exchange is a written agreement between two parties—the buyer and the seller—used primarily in international trade. It is documentation that a purchasing party has agreed to pay a selling party a set sum at a predetermined time for delivered goods. The buyer or seller typically employs a bank to issue the bill of exchange due to the risks involved with international transactions. For this reason, bills of exchange are sometimes also referred to as bank drafts.
Bills of exchange can be transferred by endorsement, much like a check. They can also require the buyer to pay a third party—a bank—in the event that the buyer fails to make good on his agreement with the seller. With such a stipulation, the buyer's bank will pay the seller's bank, thereby completing the bill of exchange, then pursue its customer for repayment.
Promissory Notes
Promissory notes are similar to bills of exchange in that they, too, are a financial instrument that is a 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.
In the United States, promissory notes have historically been limited in usage to corporations or high-net-worth individuals, but have recently become more commonly used, primarily in real estate transactions.2
Promissory notes are retained by the payee or seller and, once payment has been completed, must be canceled and returned to the issuer or buyer. In terms of legal enforceability, a promissory note is more formal than an IOU but less so than a standard bank loan.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >>
ARTICLE SOURCES
Related Articles

INTERNATIONAL MARKETS
Who uses bills of exchange?

TRADING INSTRUMENTS
5 Popular Derivatives and How They Work

CORPORATE FINANCE & ACCOUNTING
Bill of Lading vs. Bill of Exchange: What's the Difference?

LOAN BASICS
Bank Guarantee vs. Letter of Credit: What's the Difference?

FOREX TRADING STRATEGY & EDUCATION
Learn About Trading FX with This Beginner’s Guide to Forex Trading

CREDIT & DEBT
Different Types of Letters of Credit
Related Terms
Bill of Exchange
A bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at a predetermined date.
more
How Promissory Notes Work
A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money.
more
Sight Draft
A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them.
more
Negotiable Definition
Negotiable refers to the price of a good or security that is not firmly established or whose ownership is easily transferable from one party to another.
more
Credit Default Swap (CDS)
A credit default swap (CDS) is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties.
more
How Foreign Drafts Work
A foreign draft is essentially a bank draft that is drawn on a financial institution in the non-home