Bills of Exchange
A bill of exchange is an unconditional order in writing addressed one person to another requiring the person to whom it is addressed to pay to him as his order a specific sum of money. A trader can get credit facility signing a bill of exchange. It is normally payable after 90 days. A bill of exchange may also discounted with a commercial bank. The use of bills payable and the discounting of bills receivable help to overcome a cash shortage.
Advantages of a Bill of Exchange
- Risks of default are minimum
- Faster means of raising finance (if drawer is credible)
- Highly negotiable / liquid investment
- Does not require security
- Does not affect the gearing level of the company
- Unconditional and can be invested flexibly.
- Useful as a source of finance to finance working capital
- Used without diluting capital.
Disadvantages of Bills of Exchange
- Funds are limited.
- Market is impersonal because a bill of exchange can be re-discounted many times before they reach maturity.
- Can be availed only large companies