What is the Difference Between Bill of Exchange and Promissory Note

The main difference between bill of exchange and promissory note is that a bill of exchange is a written agreement between two parties engaged in international trade and validates a financial transaction between the parties, while a promissory note is a similar written agreement made between two parties involved in domestic trade.

Both bills of exchange and promissory notes are two financial instruments the traders use to ensure that a  deal has been agreed upon. They also share a similar function.

Key Areas Covered 

1. What is a Bill of Exchange 
     – Definition, Features 
2. What is a Promissory Note
     – Definition, Features 
3. Similarities Between Bill of Exchange and Promissory Note
     – Outline of Common Features
4. Difference Between Bill of Exchange and Promissory Note
     – Comparison of Key Differences

Key Terms

Bill of Exchange, Promissory Note

What is a Bill of Exchange

A bill of exchange is a written agreement between two parties engaged in international trade. It validates a financial transaction between two parties. In other words, a bill of exchange is an agreement between the buyer and the seller in the international context where the buying party has agreed to pay a seller a pre-decided sum within an already set timeframe for imported or exported goods.

Generally, in international trade, either the purchasing party or the buying party connects with a bank in order to issue the necessary bills of exchange. This step helps to avoid the risks that come with international transactions. This is why we also call bills of exchange bank drafts.

It is possible to transfer these bills of exchange by endorsement, similar to a check. They also require the purchasing party to pay the selected bank in case the party is unable to work according to the pre-made agreement with the seller. In such a scenario, the buyer’s bank pays the seller’s bank while making sure that the bill of exchange is completed. Only then does the bank encourage its customer to pay back.

What is a Promissory Note

A promissory note is a written agreement between buying and selling parties in domestic trade. In fact, the function of a promissory note is similar to that of a  bill of exchange. To elaborate further, a promissory note acts as a financial instrument or a written promise by the buying party to pay the selling party in exchange for the goods purchased.

We can also consider promissory notes as debt notes that provide financial assistance for a  company or an individual from a source different from a traditional money lender. Generally, the seller or the payee retains the promissory notes, and once the payment is made, the promissory notes are cancelled and returned to the buyer.

Similarities Between Bill of Exchange and Promissory Note

1. Both bills of exchange and promissory notes are financial instruments useful in different contexts of trade.
2. They also share a similar function.
3. Moreover, bills of exchange or promissory notes involve a buying party, a selling party, and a trading activity.

Difference Between Bill of Exchange and Promissory Note

Definition

A bill of exchange is a written agreement between two parties engaged in international trade that validates a financial transaction between the parties, while a promissory note is a similar written agreement made between two parties involved in domestic trade.

Context of Trade

Bills of exchange are used in the scenario of international trade, while promissory notes are exchanged in domestic trade.

Issued by

Bills of exchange are issued by the creditor, but promissory notes are issued by the debtor.

Conclusion

The main difference between a bill of exchange and a promissory note is that a bill of exchange is a written agreement between two parties engaged in international trade that validates a financial transaction between the parties, while a promissory note is a similar written agreement made between two parties involved in domestic trade.

Reference:

1. Barone, Adam. “How Promissory Notes Work.” Investopedia, 8 Mar. 2022.
2. Hargrave, Marshall. “Bill of Exchange.” Investopedia, 8 Feb. 2022.

Image Courtesy:

1. “Tozier Bank Draft” By TomDesjardin – Own work (CC BY-SA 4.0) via Commons Wikimedia
2. “Promissory note (AM 605759-3)” By Auckland Museum (CC BY 4.0) via Commons Wikimedia