What is bill of exchange for businesses?

Apr 05, 2024

The bill of exchange process can be likened to drafting a written and formal IOU. It functions as a binding document that ensures that a payment is made on demand or fulfilled at a later date in exchange for a particular product or service.

Bills of exchange are commonly used when conducting business involving exports and imports. 

With the bill of exchange process, all parties involved can guarantee that all the payment terms, including the amount and time at which the payment should be made, are stated clearly. The payment must be made according to the outline stated on the bill.

Who is involved in processing the bill of exchange


The payee refers to the person who will be receiving the payment. In the case of exports and imports, the payee in the bill of exchange process is likely to be the exporter.

While the payee isn’t always the same entity or party that issues the bill, in situations where the payee is the one drawing up the bill of exchange, they will act as both the payee and the drawer.


The party that is presented with the bill of exchange is the one obligated to make a payment to the payee. This party is called the drawee.

Typically, the importer receiving the products from the exporter is the drawee responsible for paying the bill of exchange cheque.


The drawer involved in a bill of exchange process is the individual or entity issuing the bill and presenting it to the drawee. In some cases, the drawer can be the same entity as the payee if they are both the recipient of the payment as well as the issuer of the bill. 

However, the drawer doesn’t have to be synonymous with the payee. Common third parties acting as the drawer of a bill of exchange cheque are banks. In an export and import business transaction, there are two bank types of drawers.

• Importer collecting bank: A bill of exchange can be issued by the importer collecting bank and presented to the importer. The collecting bank would serve as the drawer and will transfer the payment to the payee.

• Exporter remitting bank: Similarly, it can be the exporter remitting bank that issues the payment. They will send out the bill of exchange to the importer before transferring the payment to the exporter upon collection.

What are the characteristics of bill of exchange?

For a bill of exchange to be considered legitimate, it must first and foremost be a written document. It should also be addressed from one party to another, as an exchange of product and payment happens in the bill of exchange process.

There are typically three roles involved, those being the payee, the drawee, and the drawer. However, in some cases, the roles of payee and drawer can be taken up by one party.

Regardless, there must be a payee and a drawee in every bill of exchange. Your bill of exchange will not be considered valid if it doesn’t name all the relevant parties.

In addition, it must also state clearly the amount of money owed by the drawee, as well as when the payment is due. Lastly, the bill of exchange must contain the signature of the party issuing and presenting the bill.

How does bill of exchange work?

There are two common ways how the bill of exchange process works. The first assumes that the drawer and the payee are the same entity.

That entity is the one drawing up the bill and sending it to the drawee while also being the one receiving the payment. In this case, there are only two bill of exchange parties. 

A scenario that reflects the above would be if a silk exporter that provides silk fabric to a particular apparel company overseas issues a bill of exchange.

They outline clearly the amount of money that the apparel company will owe them for the export, along with when the payment must be made.

After exporting the silk, the silk exporter will present the bill of exchange to the apparel company, who must then make the payment to the silk exporter. The bill of exchange process is settled once the payment has been made.

In another scenario, the silk exporter can request payment from their bank. In this case, the bank will be the one drawing and issuing the bill of exchange to the clothing company, which obliges the company to pay the silk exporter.

All the bank does here is act as a third party that serves as an intermediary.

How many types of bills of exchange exist?

Bills of exchange can be classified into and differentiated based on two different factors. The first factor is who the issuer of the bill is. 

• Bank draft - A bill of exchange that is issued by a bank is referred to as a bank draft. In the case of a bank draft, the bank serves as the drawer and guarantees that the payee receives their payment.

• Trade draft - Bills of exchange can also be issued directly from one trading entity to another entity. When no banks are involved in the process, the bill of exchange falls under the trade draft type.

Aside from the two bill of exchange types above, bills of exchange can also be classified based on when the bill has been presented. 

• Sight draft - A bill of exchange that states that the drawee is responsible for making the payment at the time of presentation is called a sight draft. There is no future due date for the payment to be made.

• Time draft - A time draft refers to a bill of exchange that is presented ahead of the payment due date. The specific date that the payment needs to be made will be stated on the bill of exchange itself. Typically, this date will be a few days after the drawee has received the product.

Manage your incoming invoices easily with Volopay

Bills of exchange are useful instruments when conducting international business involving imports and exports. They provide a clear framework for cross-border B2B payments.

However, settling these bills can be complicated with international money transfers. Volopay offers a way to manage your incoming invoices from both local and foreign vendors.

Access an easily accessible list of your vendors, input your invoice data, and create payments to settle your bill of exchange process in no time.

The good news is that your cross-border payments can also bypass intermediary banks that charge transfer fees by transferring directly to your vendors.

To know more about vendor payment management, check out our article - Complete guide to vendor payment automation for businesses

Start managing your invoices and receipts in a single platform


Who prepares the bill of exchange?

The drawer is the party responsible for preparing and issuing the bill of exchange. This can be the payee or a third party involved to act as an intermediary, like the bank.

What are some advantages of bill of exchange?

The bill of exchange process provides certainty surrounding the payment for all parties involved. There’s a framework that serves as evidence of a debt and can also be used as proof of whether or not a credit transaction has been paid. With no room for ambiguity, bills of exchange can be convenient for credit.

What is inland bill collection?

An inland bill refers to a bill of exchange that is paid in the same jurisdiction as the country that it was drawn and issued. Therefore, inland bill collection is the payment made for an inland bill. The collecting bank would be the issuer of an inland bill.

What is outward bill for collection?

An outward bill for collection is a bill of exchange drafted by the exporter remitting bank sent to the importer’s country. It’s referred to as an outward bill because it involves issuing a bill in one country and sending it to another.