Information > Financial Terms > This page

Bill of Exchange
Source:  Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

The Uniform Commercial Code (Sec. 3-104) provides that a writing which complies with the requirements of that section for any writing to be a negotiable instrument is a DRAFT (Bill of exchange) if it is an order.

The terms bill of exchange and draft are used interchangeably, but the former is usually applied to an order to pay money arising out of a foreign transaction, while the latter term is more often reserved for domestic transactions.  Technically, moreover, a bill of exchange is always a negotiable instrument, whereas a draft may be nonnegotiable.

A bill of exchange is a three-party instrument in which the first party (drawer) draws an order for the payment of a sum certain on a second party (drawee) for payment to a third party (payee) at a definite future time.  According to the Uniform Commercial Code, a bill of exchange is the same as a draft.

A foreign bill of exchange is drawn in one country upon a person in another country not governed by the same laws.  A bill of exchange drawn in one state upon a person residing in another state is considered a foreign bill.


Bill of Exchange

July 15, 1990

On July 15, 1990 , pay to Williams Company or bearer $10,000 plus 10% annual interest from June 5, 1990 .

To:        XYZ Corporation
            /S/ Charles W. Waters

Types of drafts include:

1.    Trade acceptance in which a seller of goods extends credit to a purchaser by drawing a draft on the purchaser directing him or her to pay the seller a sum of money on a specified date.

a.         Trade acceptances require the signature of the buyer on the face of the instrument.

b.         The seller can usually discount the instrument and receive cash.

c.         The seller is usually both the drawer and the payee.

2.    Bankers acceptance is a draft in which the drawee and the drawer are a bank.

3.    Sight draft is payable upon presentation to the drawer.

4.    Time draft is payable at a specified date or payable a certain period of time after a specified date.

5.    Money order is a draft purchased by one party to pay payee in which the third party is usually the post office, a bank, or a company.

6.    Check is a draft that is payable on demand and the drawee is a bank.

Back to Information