What Is a Bill of Exchange in the Export Trade?
When you become involved in the export trade, knowing the various options available to your business is critical. For example, discovering the role of trade finance solutions in ensuring you have the capital to run your business is invaluable.
To run your business, you need to know different aspects, like the bill of exchange. The bill of exchange is the foundation of international trade as it facilitates transactions with the exporter, the importer, and a third party like the authorized dealer or bank.
What’s a bill of exchange?
The bill of exchange is a formally written order from the drawer and forms the basis for export payment terms. It directs the drawee to pay a specific amount to a third party or the payee at a specified date or on demand. The exchange invoice is crucial to managing payment risks and enabling financial transactions between the global businesses involved in the trade.
What role does the bill of exchange play in export trade?
Whether availing of a bill discounting facility from your bank or a working capital loan with attractive repayment terms and lower interest, the bill of exchange forms the foundation for moving the transaction forward.
What are the key aspects of a bill of exchange?
1. The drawer: This is typically the seller or exporter who creates and issues a bill of exchange
2. The drawee: This is the party who is requested to make the payment and is usually the buyer or the importer
3. The payee: This is the entity to whom the drawee will make the payment. This can either be a third party like a financial institution or a bank or in some cases, the exporter
4. The amount: This is the sum of money specified to be paid to the payee
5. The date: This indicates the date when the payment must be made or when the bill becomes due for payment
6. The payment terms: This shows the payment terms, like the payment is to be made on sight (when the bill is presented for payment), in a month, two months, and so on
7. The signature: This indicates the signature of the drawer on the exchange invoice, which validates and makes it binding legally
How does the bill of exchange work in export transactions?
The sequence of events leading to the bill of exchange is logical and starts with the importer or buyer expressing interest in purchasing the goods from the seller or the exporter.
1. Business agreement: The importer and exporter discuss the quality and quantity of goods to be delivered and payment terms. The process starts once they agree on the details and the use of a bill of exchange for payment.
2. Bill of exchange issuance: The exporter drafts the bill of exchange based on the agreement. This document specifies the payment amount due, the payment due date, and other details related to the transaction.
3. Accepting the bill of exchange: The importer will review the document and suggest modifications if necessary. On accepting the changes, the importer will commit to paying the specified amount in the bill on the due date.
4. Presenting the bill of exchange: The exporter will present the finalized bill of exchange to their bank to obtain funds or collect the amount due.
5. Paying the amount: On the date the exchange invoice is due, the importer’s bank will pay to the exporter’s bank. The payment of the amount owing completes and closes the transaction.
What are the different types of bills of exchange?
Since each export transaction is unique and the requirements of both parties can differ, there are different types of bills of exchange in export.
1. Time bill: This bill of exchange will come due on a specified date in the future to provide the importer time to arrange funds. However, this can pose a risk to the exporter.
2. Trade bill: This category of exchange invoice is used in commercial transactions without the involvement of financial institutions. This bill of exchange is used when both parties know each other well and there is a relationship of trust between them.
3. Sight bill: This bill of exchange becomes due when it is presented for payment, which is why it is called the sight bill. Often used for first-time transactions, this bill offers quicker payment but may incur higher costs.
4. Documentary bill: This bill of exchange is accompanied by a title and shipping document to ensure that payment is made only when the importer receives the goods as per the agreement with the exporter.
What are the benefits of using a bill of exchange?
A offers many benefits for export transactions. It reduces non-payment risk by explicitly and legally binding the buyer or the importer to pay when it is due.
● Also Read: What Are the Different Types of Export Invoices?
The bill of exchange also provides a basis for exporters to avail of bank financing before the due date. It also documents the transaction details, including the specification of the goods, the transaction details, and other details. This ensures everything is clear at a later date.
It adds flexibility to export transactions, clarifies different transactions, and makes them legally binding.
What are the risks involved with bills of exchange?
1. Currency changes: This does not factor in the fluctuations in currency exchange when it is issued. This can be a risk factor.
2. Risk of non-payment: The exporter depends on the importer’s financial ability to receive payment on the due date. If the importer fails to pay for any reason, the exporter will have to face financial losses.
3. Legal implications: Since export transactions are across borders, the legal validity of the bill of exchange can be vague or difficult to navigate.
A can be vital in ensuring smooth export transactions, offering financing options, and shoring against risks to a certain extent. However, all cross-border transactions involve inward remittance, and an intelligent platform is needed to support this.
At LeRemitt, we provide a safe, secure, and transparent platform to enable this. Click here to learn more.
