Bill of exchange - Meaning, use and requirements

Apr 05, 2024

When your customers pay in credit, they still have to eventually settle their credit bill at the agreed-upon date and make sure that you receive the amount that they owe you.

This is where the bill of exchange in Australia comes in. To hold every party accountable, a bill of exchange can be drawn up in accordance with the Bill of Exchange Act 1909 and be legally binding for all parties involved.

What is bill of exchange?

The bill of exchange in Australia involves a written and formal IOU. Creating a bill of exchange is done to ensure that a payment is made and fulfilled at a later date in exchange for a good or service.

When the bill of exchange follows all the required conditions, then the amount of money and the time at which the payment must be made is considered unconditional.

Similar to a contract, a bill of exchange transaction must be fulfilled. At its core, the bill of exchange in Australia exists to make sure that payments promised to be made at a later date are actually followed through.

But basics aside, drawing up a bill of exchange can get complex depending on the uses. 

What are the uses of the bill of exchange?

Bills of exchange are commonly issued for credit. An example of this is if you receive goods from your vendors but pay for them at a later date.

To ensure that they receive payment, a bill of exchange transaction may happen. One possible and common use for a bill of exchange is to raise short-term funds for your business.

If you need funds now, a bill of exchange may be drawn up so that you receive the funds and pay it back later. 

Another common use of the bill of exchange in Australia is for large international transactions. Bills of exchange created for this purpose are called trade bills.

They are largely similar to the generic bill of exchange but can be a bit more complex. Trade bills involve your business selling goods or services to another party and taking the payment on credit.

In the case of a trade bill, prices could be negotiated before it is signed to signify that the payment will be made at the agreed-upon date.

Despite the uses of the bill of exchange process, it’s not as common in the modern era to draw and write up a bill of exchange.

With the shift towards online operations, which includes purchases, the written bill of exchange is seeing a usage decline.

The emergence of credit cards also has made it the preferred credit payment method compared to bills of exchange.

Who is involved while creating the bill?

There are three parties involved in the bill of an exchange transaction. The bill of exchange in Australia makes the bill legally binding for all three parties.

There is some degree of risk involved for all parties involved. Here are the three different parties involved in the creation of a bill of exchange.

The drawer

As its name suggests, the drawer is the party responsible for drawing up the bill of exchange. They are the one who orders the money stated on the bill of exchange to be paid.

Despite being the one writing the bill, the drawer doesn’t have to be receiving party for the money.

Their biggest responsibility in the process is to aid the receiver of the money, called the payee, if the sending party doesn’t send the money on time.

The drawee

In simple terms, the drawee in the bill of exchange in Australia is required for making the payment. They have full responsibility to ensure that the payment is made in full and on time.

If the drawee refuses to pay or makes their payment late, then the bill of exchange is considered dishonored.

The payee

The payee is the party that receives the payment stated on the bill of exchange. If the amount stated is not paid at the fixed time that has been agreed on, with the help of the drawer the payee could sue the party responsible for paying them.

What are the requirements of bill of exchange in Australia?

Not every written document regarding payment at a later date can be classified as the bill of exchange process. There are circumstances and conditions where a bill of exchange might be invalid.

The bill of exchange in Australia must fulfill the following requirements to be considered valid.

1. Must be in writing

As a formal and legal document, the bill of exchange in Australia states that bills of exchange have to be in writing to be considered valid. When it is drawn up in writing, it becomes an unconditional order.

2. All relevant parties must be named

In order to determine who is involved in the bill of exchange, every party needs to be named. This is to ensure that it is clear who is responsible for which part in the bill of exchange, and that they fulfill what they have to.

3. Must be addressed from one party to another

According to the Bill of Exchange Act 1909, a bill of exchange is a document addressed from one person or party to another. As there is a change of hand in the money involved, the party required to make the payment must be the party addressed.

4. Signature of the party giving it

To officiate the bill of exchange, the party giving the bill of exchange must sign it. This is to ensure that the party giving the document is the correct party and that the payment request is all in order.

5. Time at which money is owed

One of the required bill of exchange features the time at which the payment must be made. The amount of money owed must be paid no later than the time that has been agreed on in the bill of exchange.

6. Amount of money must be specified

The bill of exchange states that a bill of exchange must state the sum of money owed. There can’t be additions to the sum of money for it to be considered a bill of exchange.

The drawee is responsible for paying exactly the amount on the bill.

Moving into the modern era where people are accustomed to credit cards, the bill of exchange in Australia is becoming a less common talking point when it comes to credit payments.

Credit cards are easy to use, hassle-free, and don’t require you to put anything into writing. Regardless, it’s important to be aware of the uses of the bill of exchange even in the modern era.

In the business sphere, there are still some circumstances where you might see yourself participating in a bill of exchange transaction. Knowing how bills of exchange work could just come in handy.

Interesting read: What is market penetration pricing strategy for businesses?


Is bill of exchange a legal document?

Yes. If the payment according to the bill is not made on time, the bill holder has the authority to take it to a court of law and sue. The bill of exchange is a legally binding document that holds the parties who signed it responsible for the parts they play.

What are the 2 types of bill of exchange?

The two common types of bills of exchange are trade bills and accommodation bills. Accommodation bills are drawn and used by two parties to mutually help each other and give each other financial support. The type that is more commonly used in business, however, is the trade bill. Trade bills are created when customers purchase goods or services from your business but agree to pay at a later date after receiving the product.

Is cheque a bill of exchange?

While cheques are of a similar nature to bills of exchange, they are not the same. A cheque can be considered more straightforward than a bill of exchange. This is on account that cheques clearly specify and require the bank of the customer’s bank account to release funds and pay the business the cheque is addressed to. A bill of exchange doesn’t have a fixed source the way a check does. It only requires that the amount written gets paid on time regardless of the source.

Who pays a bill of exchange?

The drawee is fully responsible for paying a bill of exchange. If one company buys supplies from a vendor to make products for a customer and agrees to pay the vendor at a later date with money from the customer, the customer will become the drawee in the Bill of Exchange Act Australia. The company making the product is responsible for ordering that the money from the customer gets paid directly to the vendor to settle their bill. 

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