![]() ![]() READ: Cash Management: Definition, Objectives, Models, Strategies and Limitation A bill of exchange issued by a bank, known as a bank draft, can be issued immediately with a later maturity date. Both parties agree on trade terms and conditions and decide to use a bill of exchange as a payment method. It usually involves three parties a drawee, payee, and the drawer. Working Mechanism – Bill of Exchange and A Letter of CreditĪ bill of exchange can be arranged by two parties directly or with the help of a bank. A letter of credit is by default irrevocable, non-confirmed, and non-transferable. The bank can issue the facility as a loan facility to the applicant. In the case of the buyer’s default, the bank covers the amount of the letter of credit. Definition – A letter of CreditĪ letter of credit is a form of bank guarantee that the beneficiary will receive the payment if the applicant fails to make the payment. It can be issued by individuals, companies, or financial institutes like banks. It can be transferred to a third-party with endorsement, and the first party will be bound to make the payment to the bill of exchange presenter.Ī bill of exchange is a negotiable financial instrument that can be traded on the secondary market. A bill of exchange closely resembles a bank cheque. Definition – A Bill of ExchangeĪ bill of exchange is a written instrument that obliges one party to make payment to a second party on a fixed date and agreed amount. Here is our comparison guide on both types of financial instruments. A letter of credit is a widely used instrument in international contracts as it comes with greater authenticity and credibility. A letter of credit can work as a payment instrument but is largely used as means of financial guarantee.īoth instruments are used in domestic and international trade contracts. A bill of exchange is essentially a payment instrument. ![]() From formal bank cheques to bank guarantees, parties in trade contracts can use several payment methods. There are various payment instruments in international trade. ![]()
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