Bill of Exchange (Draft) Transaction

Related Pages : What is Bill of Exchange? , Bill of Exchange sample 

On this page I will try to explain you "Bill of Exchange Transaction" or "Bill of Exchange Process" especially when bill of exchange is used in conjunction with a letter of credit. Please keep in mind that "Bill of Exchange" is called as "Draft" on some occasions in letter of credit texts. 
Keywords : bill of exchange, draft, Bill of Exchange TransactionBill of Exchange Process, bill of exchange definition, drawer of a draft, drawee of a draft, payee of a draft, payee, drawer, drawee, drawn on 

Parties to Bill of Exchange / Draft  :

First of all we have to learn the parties involved in a bill of exchange process. After we learn the parties of bill of exchange, we can start describing bill of exchange transaction. According to UK's Bill of Exchange Act (1882) bill of exchange defined as an unconditional order in writing, addressed by one person to anothersigned by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person (payee), or to bearer". 

  • Drawer of a Bill of Exchange / Draft :  Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller or exporter.
  • Drawee of a Bill of Exchange / Draft :  Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the buyer or importer.
  • Payee of a Bill of Exchange / Draft : Is the party to whom the Bill is payable; usually the seller or their bankers such as confirming bank or nominated bank. (source : aib trade finance )
Bill of Exchange / Draft Transaction :

Figure 1 : Basic bill of exchange transaction flow chart 

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How does a Bill of Exchange work? 
Bill of exchange which is also known as draft is a tool commonly used in international trade transactions. Bill of exchange can be used as a supporting financial document in cash against document and letter of credit payments. 

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Assuming that we are talking about a bill of exchange which is payable at 60 days at sight. (usance bill of exchange) We also assume that bill of exchange is payable to drawer. Draft drawn on drawer.
Step 1 : The Drawer draws the bill of exchange and send it to drawee for acceptance.
Step 2 : The Drawee accepts the bill of exchange and send back to drawer.
Step 3 : The Drawer endorses the bill of exchange to his bank in order to discount it.