Published on May 27, 2025Updated on May 30, 2025
Understanding the difference between a promissory note and a bill of exchange is important for businesses and individuals engaged in financial transactions. Both are financial instruments in India that facilitate payments, but they serve different purposes and have distinct legal implications.
This article explains promissory note vs bill of exchange, their applications, and legal aspects.
A promissory note means a written, unconditional promise made by one party (the maker) to pay a specific sum of money to another party (the payee) either on demand or at a predetermined future date. Promissory notes are commonly used in personal loans, business financing, and other credit transactions.
Here’s a simple example of how a promissory note works:
Imagine a small business owner borrowing INR 1,00,000 from a friend to purchase equipment. The owner writes a promissory note stating the amount borrowed, the interest rate, the repayment schedule, and the due date.
This document serves as a legal commitment to repay the debt under the specified terms.
A bill of exchange is a written, unconditional order from one party (the drawer) directing another party (the drawee) to pay a specific sum of money to a third party (the payee) either on demand or at a future date. It is widely used in international trade and domestic commerce to facilitate payments. The bill of exchange becomes legally binding when the drawee accepts it.
Here’s a simple bill of exchange example:
Consider an exporter in India selling goods worth INR 5,00,000 to an importer in the UK. The exporter draws a bill of exchange instructing the importer to pay the amount within 60 days. The importer accepts the bill, acknowledging the debt.
This document can be discounted with a financial institution, providing immediate funds to the exporter.
|
Aspect |
Promissory Note |
Bill of Exchange |
|
Nature |
A promissory note is an unconditional promise made by the maker to pay money. |
A bill of exchange is an unconditional order by the drawer for the drawee to pay money. |
|
Parties Involved |
It involves two parties: the maker, who promises to pay, and the payee, who receives the payment. |
It involves three parties: the drawer (who issues the order), the drawee (who pays), and the payee (who receives the money). |
|
Acceptance |
A promissory note does not require acceptance by any party. |
The drawee must accept a bill of exchange to be valid. |
|
Liability |
The maker is directly and primarily liable to the payee for payment. |
The drawee becomes primarily liable only after accepting the bill; until then, the drawer is liable. |
|
Transferability |
A promissory note can be transferred to another party through endorsement. |
A bill of exchange can also be transferred by endorsement to another party. |
|
Use Case |
Promissory notes are commonly used in personal loans and business financing. |
Bills of exchange are mainly used as trade finance instruments and in international commerce. |
Both these types of negotiable instruments are governed by the Negotiable Instruments Act, 1881 , in India.
Promissory Notes:
Bills of Exchange:
Both promissory notes and bills of exchange are recognised under the Negotiable Instruments Act, 1881, in India. They are legally enforceable documents that outline the obligations of the parties involved.
In case of default or non-payment, the aggrieved party can seek legal recourse, which may vary depending on jurisdiction and the terms set in the document. Properly executed instruments ensure clarity and legal protection in financial dealings.
Understanding the difference between a promissory note and a bill of exchange is essential for effective financial management. While both are types of negotiable instruments, they serve different purposes, whether for personal lending or as trade finance instruments.
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A bill of exchange involves three parties: the drawer, the drawee, and the payee. This makes it different from a promissory note, which only involves two parties: the payer and the payee.
In a promissory note, the maker is directly liable to pay the amount to the payee. This contrasts with a bill of exchange, where the drawee becomes liable only after acceptance.
Yes, a promissory note is a type of negotiable instrument and can be transferred through endorsement.
In a promissory note, payment is made directly by the maker to the payee. In a bill of exchange, the drawee pays after accepting the order made by the drawer.
Yes, acceptance is required in a bill of exchange. The drawee must formally accept the order to pay, which is not needed in a promissory note.
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