Bills of exchange
Bills of exchange have been used to smooth the progress of overseas trade for a long time. Known to have been used by the Babylonians, Egyptians, Greeks and Romans, the bill of exchange appeared in its present form during the
13 th century among the Lombards of northern Italy who engaged in widespread foreign trading.
These instruments became particularly useful in the burgeoning international trade of the 19th and 20th centuries.The seller of goods to be exported to a buyer in another country frequently grants the customer a number of months in which to pay. The seller will draw up a bill of exchange (also called a trade bill). This is a legal document showing the indebtedness of the buyer. The exporter also obtains a bill of lading from the carrier to show that the goods have been appropriately despatched. The airline, shipping firm or other carrier signs the bill of lading and sends it to the exporter or its bank, confirming that the goods have been received by the carrier, that the carrier accepts responsibility to deliver the goods to the importer, and showing evidence of ownership of the goods, insurance certificates and commercial invoices. Then the relevant documents are sent to the importer or its bank.
At this point the bill of exchange may be forwarded to and accepted by the customer, which means that the customer signs a promise to pay the stated amount and currency on the due date (a time draft). The due date is usually 90 days later, but 30-, 60- or 180-day bills of exchange are not uncommon. However, note that some bills of exchange are sight drafts (‘documents against payment' drafts), payable on demand immediately.
More usual is for the bill first to be sent to the exporter's bank, which, in turn, sends the draft and the documents to a bank in the importer's country with which the exporter's bank has an ongoing relationship.
This correspondent bank will be instructed to get the draft signed, that is, accepted, by the importer, or to receive payment in the case of a sight draft. Then the correspondent bank will hand over the bill of lading documents permitting the importer to claim the goods. With payment on a sight draft the correspondent bank will transfer the funds received from the importer to the exporter's bank, which will credit the exporter's account. Fees will be charged for facilitating these transactions. With time bills the exporter will receive a promise to pay in, say, 90 days.The banks have reduced the risk for the exporter by ensuring that the goods are not released to the importer until money or a promise is in place. Also, for the time draft, there is a legal acknowledgement that a debt exists, facilitating easier access to the legal systems in the event of non-payment.
As well as the benefit of a potential credit period before paying on a time draft, risk for the importer is reduced because payment will be made only if the goods are present and correct with all the documentation.
More on the topic Bills of exchange:
- 22 Foreign Exchange
- Hare C., Neo D. (eds.). Trade Finance: Technology, Innovation and Documentary Credit. Oxford University Press,2021. — 417 p., 2021