Difference between Promissory Note and Bill of Exchange

When a drawer dishonors a promissory note, no notice is served to this individual. Difference between bill of exchange and promissory note is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App. 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. They can, conversely, be transferred at a discount before the date specified for payment.

What is the difference between Bills of Exchange and Promissory Note?

If bills of exchange are issued by individuals, they can be referred to as trade drafts. A bill of exchange is a legally enforceable agreement between two parties that one would pay the other a specific sum of money on demand or as of a specific date. The ease of using credit to buy and sell items allows customers to spend more money than they have. These negotiable instruments make it possible for new businesses to be established while efficiently utilizing their resources. A bill of exchange is a written agreement with an average absolute initiating an individual to pay a specific amount to a specific person.

Content: Bill of Exchange Vs Promissory Note

A promissory note or bill of exchange or cheque payables either to the order or bearer are deemed as the instruments under negotiable instrument acts of 1881. The promissory note is actually an undertaking from the debtor to pay a certain sum of amount to the creditor or to his order. The bill of exchange is kind of negotiable instruments generally arising out of trade transactions. Let’s find out the key difference between a bill of exchange and a promissory note. It is a negotiable financial instrument, which is issued by a debtor.

Difference Between Promissory Note and Bill of Exchange For Exams

1. The choice between a promissory note and a bill of exchange depends on the nature of the transaction and the preferences of the parties involved.
2. The conditions of a loan agreement, the lender, and the borrower are all identified in promissory agreements.
3. A promissory note can be issued by a bank, but it can also be issued by an individual, a company, or a business—anyone who is lending money.
4. Although bills of exchange are similar to the promissory note, many differences exist between them.

Other payment instruments in the Indian money market were introduced by the private banks and the Presidency Banks. Cheques were introduced for the first time in India by the Bank of Hindoostan, in 1770. In 1827, the British introduced “post bills” that were Inland “promissory notes” issued by the bank at a distant place. The holder of the post bill would be paid on acceptance after a specified number of days and was similar to muddati hundis already existing in India. To formalise the use and standardise the characteristics of instruments like the cheque, the bill of exchange and promissory note, the Negotiable Instruments Act (NI Act) was enacted in 1881. Negotiable instrument is a piece of paper that entitles a person to a certain sum of money, transferable from one person to another by mere delivery or by endorsement and delivery.

Promissory notes are commonly used in various financial transactions, including personal loans, mortgages, and business financing. While both promissory notes and bills of exchange are financial instruments used to facilitate transactions, they differ in their structure, parties involved, and primary use. Understanding these differences is essential for individuals and businesses engaged in various financial arrangements and commercial transactions.

The choice between a promissory note and a bill of exchange depends on the nature of the transaction and the preferences of the parties involved. A bill of exchange is a written order issued by one party (the drawer) to another party (the drawee) directing the drawee to pay a specified sum of money to a third party (the payee). Bills of exchange are commonly used in commercial transactions, especially in international trade, where sellers may provide credit to buyers. The bill of exchange facilitates the payment process and acts as a type of negotiable instrument.

Their use has decreased as alternative payment methods have grown in popularity. With a promissory note, serving a notice is not necessary if it is dishonored. If a promissory note is formed jointly, there will be both joint and several liabilities. If a bill of exchange is accepted jointly, the obligation of the drawer will also be joint.

The last decade has seen an electronic revolution in the banking sphere in India, but negotiable instruments are still used widely. Their existence depends on people overcoming the problems faced due to digital banking but someday in the future, they may become obsolete. In business, bills of exchange and promissory notes are just as significant as cheques. However, these concepts, which are essential for commercial transactions and financing reasons, are rarely discussed. When a debtor acquires items on credit, bills of exchange are one of the most important negotiable documents. The creditor sends a bill of exchange to the debtor, instructing him to pay the amount within the specified time frame.

Difference Between Promissory Note and Bill of Exchange – Related FAQs

On the other hand, a promissory note does not require any kind of acceptance. So, when one is working with these two, he/she should be known about the meaning and features. A promissory note need not be accepted by a drawee to be legal and binding, while the latter must be accepted by the drawee. Consequently, notices are not served on dishonouring of a promissory note unlike in the case of a bill of exchange. These financial instruments allow copies and do not have any specified limit.

It is an instrument given in writing with an unrestricted guarantee to pay a certain amount of money to a certain individual or to the bearer of the instrument and signed by the maker of it. A promissory note is a written contract between a lender and a borrower that includes specifics of a loan, such as the loan amount, the interest rate, and the payment schedule. Although a promissory note is not a contract, you will almost certainly be required to sign one before taking out a mortgage. The conditions of a loan agreement, the lender, and the borrower are all identified in promissory agreements. In international trade, a sight draft allows an exporter to hold title to the exported goods until the importer takes delivery and immediately pays for them. If a bill of exchange is issued by a bank, it can be referred to as a bank draft.

The person on transfer of the negotiable instrument also becomes entitled to the money and the right to further transfer it. Negotiable instruments are  documents that are exchangeable and have a monetary value which is two of their main characteristics. The negotiable instruments and all their aspects are governed by the Negotiable Instruments Act, in India. This Act defines these instruments and has provisions for each type of them individually. Negotiable instruments must contain important information such as the date, the signature of the payer, the principal amount and also the interest difference between bills of exchange and promissory note rate. A promissory note is a written agreement for the repayment of a loan.

In the case of promissory notes, the liability of its drawer is primary and absolute. These are issued by creditors and contain their stamp and signature along with a predetermined date for payment and a fixed amount. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for payment. The bill of exchange was an acknowledgment created by Car Supply XYZ, which was also the creditor in this case, to show the indebtedness of Company ABC, the debtor. However, if the funds are to be paid at a set date in the future, it is known as a time draft.

Say Company ABC purchases auto parts from Car Supply XYZ for $25,000. 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.