A Bill of Exchange is something that reduces our credit risk, Let’s understand this concept better with the help of an example; Omkar being the seller sold goods worth Rs 10,000 to Ishaan being the buyer on credit. In the given case, Omkar has sold goods to Ishaan believing that on some future date he will make payment. Now, we can analyze that Omkar is a little skeptical regarding the certainty of receipt and time of such payment. In order to set an exact date of payment and to make his transaction legally valid, Omkar will draw a document in writing. Such a document is called Bills of Exchange. Advantages of bills of exchange are discussed below
Advantages of bills of exchange
The advantages of bills of exchange are listed below.
- Legally Valid: It is a legally valid written, signed and stamped acceptance of the debt by the Drawee. In case of a failure on part of Drawee to honour his commitment a suit against him/her can be filed in the court of law on the basis of the Bill.
- Can be Endorsed: Bill of Exchange can be easily endorsed (or transferred) in favour of Creditors or Suppliers or any other person.
- Ensures timely payment: As date of payment is fixed in the Bill of Exchange, so this ensures seller that he/she will receive his/her payment in full and in time. Due to this certainty he/she can plan his future cash flows.
- No fear of dishonour,easily recoverable: As Bill of Exchange is a legally acceptable document, so in case it gets dishonoured then the debt can be easily recovered as compared to other debts.
- Can be discounted: It can be discounted with the bank any time before its maturity. It provides liquidity to the instrument because, whenever drawer requires cash then he/she can discount the bill of exchange with the Bank. Bank will deduct some amount of discounting charges and pay the remaining amount to Drawer.
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