Trade bills are financial instruments used in trade transactions, typically as evidence of a debt owed by one party to another. They serve as a written promise or order to pay a specified amount of money on demand or at a future date, often as part of commercial activities.
Types of Trade Bills :
Bills of Exchange : A written order from one party (the drawer) directing another party (the drawee) to pay a specified amount to a third party (the payee) at a predetermined date.
Example : A seller (drawer) issues a bill to the buyer (drawee), who agrees to pay after receiving goods.
Promissory Notes : A written promise by one party to pay a specific sum of money to another party at a future date or on demand.
Example : A buyer issues a promissory note to the seller, agreeing to pay for goods received after a certain period.
Key Features of Trade Bills :
Negotiable Instruments : Trade bills can often be transferred to third parties through endorsement or delivery.
Short-Term Financing Tool : They are typically used for short-term credit, enabling businesses to manage cash flow efficiently.
Legal Document : Trade bills are legally enforceable, meaning they provide security and trust in trade transactions.
Involvement in Trade : Trade bills are common in both domestic and international trade transactions.
Functions of Trade Bills :
Facilitate Trade Credit : They allow buyers to receive goods or services on credit, with payment deferred to a future date.
Provide Liquidity : Sellers can discount trade bills with banks or financial institutions to get immediate cash instead of waiting for payment.
Reduce Credit Risk : The legal enforceability of trade bills reduces the risk of non-payment in trade transactions.
Encourage Trust : They provide a formal agreement and record of the transaction, increasing trust between trading parties.
