Bills of Exchange Explained

A bill of exchange may be a rather bizarre and exotic sounding financial creature, so just what exactly is it?

Well, simply but, a bill of exchange refers to a financial instrument that is drawn and issued by the seller of goods to the buyer.

The bill of exchange specified how much money is to be paid, and that sum can be required either right now or at a date in the future that is specified, e.g. a few months down the line.

If the buyer accepts the bill, they agree legally that they must pay the required sum at the required date and time. The bearer then gets whatever the proceeds are at the time the bill of exchange reaches maturity, a way of saying when it is due.

There is another term, which is an 'eligible bill' and this refers to those that are one of a list of eligible accepting banks that are maintained by the Bank of England which has in the region of around 160 - 170 banks on the list.

Eligible bills must be in sterling, with a maximum 187 days, or approx six months term, and be payable in the UK.

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