Promissory notes and drafts – the main difference
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Promissory Notes and Drafts: Term and Rules of Using

Promissory Notes and Drafts: Term and Rules of Using


1. Some History or How Modern Bills Appeared

2. Modern Legislative Framework: What is a Bill? Everybody Must Know!
2.1. Required Details of Bills – How to Be Sure The Security Forms Are Filled Correctly?

3. Promissory Notes and Drafts – What Is The Difference Essence?

4. Features of Payments – How to Claim Your Money?

5. Main Terms of Circulation of Bills – Simply about Difficult Things!
5.1. Endorsement – Nuances of Securities
5.2. Transfer Cession – Find 4 Differences!

6. Circulation of Bills or the Way to Money

7. Modern Bill Discount: Rules and Features
7.1. US Financial Market – Promissory Instruments
7.1.1. Treasury Bills
7.1.2.Discounted Bills
7.1.3. Short-term municipal bonds
7.1.4. Commercial papers
7.1.5. Bank acceptances
7.1.6. Medium-term bills
7.2. Advantages of Using Bills – Favors of the Obligation
7.3. Problems of Using Bill Schemes – Mistakes to Avoid!

People have been engaging realized entrepreneurship for decades, but only recently it’s been discovered how to documentarily acknowledge the debt owned by the purchaser to the seller. The best form of acknowledgment of such debts and payments on them is using promissory notes and drafts (together – bills). A bill is a contract assisting a creditor to claim the arranged amount of money from their owner.


Some History or How Modern Types of bills Appeared


What is a bill? It is the most important financial instrument among discovered by humankind. It’s commonly considered that Italian merchants were those who gave the birth to the appearance of looking like we know it today. Those merchant used bills for transferring different currencies without cash though state borders.

Among preimages of bills, the most famous are chirographs of Ancient Greece, which Romans used later. In the 8th century, the role of securities to acknowledge the presence of debt obligations was played by “feiqian” (“flying money”), which were then changed to “jiaoin” and “jiaozi” in the period of Song dynasty. In Arab countries, functions of bills were performed by vouchers (“suftajah” and “hawala”), which appeared almost at the same time with their Italian analogs.history of bills

Having emerged as a debt voucher, bills started being an equivalent in currency exchange. In particular, a debt voucher issued in the one country could give the owner money in another country. That’s why, different types of bills were very common throughout Europe. Massive growth of operations number became the reason of unification of rules of circulation of bills, and in 1569, in Italian Bologna, the first code was created.

In Russia, European bills first came in the middle of the 18th century. And it occurred because of merchant engaging energetic trading with German principalities. That’s why, Russian name of this debt paper goes from German “Wechsel” meaning “transfer” or “exchange”. A legislative act designed to regulate features of circulation of Russian bills, was developed in 1729. Later, it was repeatedly corrected in order to be adapted to Russian rules of conducting commercial operations.


Modern Legislative Framework: What is a Bill? Everybody Must Know!

In modern and dynamically changing world, legislative acts are being created, corrected and canceled with with kaleidoscopic rapidity. With this background, bill law looks like a corner of stability and calmness. In many countries, circulation of bills was regulated by laws, acknowledged in the early 20th century. Theirs basic positions were practically identical to laws written in the International Convention.

In modern USA, nuances of circulation of bills are regulated by the Uniform Commercial Code (article 3), which reproduces laws of the mentioned Convention, with slight differences. In particular, according to the definition given in it, a bill is the security formalized by the regulated form certifying the transfer of rights to the holder and giving the indisputable right to require the debtor to repay the arranged amount. It must be mentioned that enforcement practice for the last quarter of the century, has shown elaboration, consistency and completeness of American legislation in this field.

bill law

Required Details of Bills – How to Be Sure The Security Forms Are Filled Correctly?

They are written in the Uniform law, ratified by the Appendix #1 to the Geneva Convention for №358. These details consist of:

  • “BILL” mark – compulsory
  • The order to pay the certain amount
  • The name of the original holder
  • Payment deadline
  • Name of debtor
  • Place and date of acknowledgement
  • Name of the payee
  • Signature of the drawer

If those details are absent, the bill is considered invalid.

The exceptions of this case are the following situations:

  • Bills are fulfilled in the moment of their submission if the payment deadline is not specified;
  • If there is no place of acknowledgement, it’s specified as the debtor’s address;
  • In case of signing a bill by citizens that cannot own, signatures of other remaining persons remain valid.


Modern Bill Is: Promissory Notes and Drafts – What Is The Difference Essence?


Types of bills – the key term of circulation of bills:

  • Promissory note means the obligation of the debtor to pay the arranged amount to the holder, which has no additional acknowledgements. There are two sides: the creditor and their debtor.
  • Draft is the debt security, according to which, the debtor gets a written order to pay the mentioned amount to the drawer with no conditions. There are 3 sides in the process of claiming money: the drawer, the payee and the drawee.

Such bill must always go with the acceptance – the acknowledgment procedure confirming the capability of the debtor to pay the arranged amount to the payee. A drawer in this case is the warrantor of fulfillment of those obligations. Therefore, in promissory notes, drawers are obliged to execute the payment themselves; while in drafts, they delegate this to others.

Without realization of the problem “what is a bill” and “what are differences between its two types”, it’s impossible to properly examine the mechanism of transferring bills from the one holder to another and to figure out legal consequences of it.promissory notes and drafts Frankly speaking, a draft is a particular case of a promissory note. Initially, all the bills are issued as promissory notes: they make debtors pay arranged amounts to the creditors.

After the creditor transfers a bill to the counterparty at the expense of repayment of their own obligations or brings it to the bank for discount, a promissory note becomes a draft. Any bill, in which a creditor and a payee are different persons, is considered a draft. And those securities can change holders several times during the period of the circulation.

Bills can change their characteristics. A promissory note can become a draft through the endorsement  (transfer of rights). And a draft can acquire properties of a promissory note through the acceptance.


Features of Payments – How to Claim Your Money?

Laws provide 4 variants of payment deadlines, and in particular, they are:

  • “At sight” – on the day of payment claim. But there is another variant possible: “At sight but before the specified date”. In this case, debt will be fulfilled on any day when the arranged deadline is reached.
  • “In specified time period after the sight” – the payment will be possible after the specified time interval after the drawing of the bill, which is acknowledged by the appropriate mark on its front side.
  • “Within specified time after the drawing” – the payment will be possible within certain number of days after the drawing of the bill.
  • “On the day specified in the bill” – the payment of the security will be engaged on the date specified in it.

The point “Place of Payment” became the required detail of every bill. If anything other is not specified, the address of the debtor plays this role. It’s worthwhile that bills specifying more than one place of payment are always invalid. According to legislative framework, if this detail is absent on the paper, legal address of the drawer becomes it.


Main Terms of Circulation of Bills – Simply about Difficult Things!

Most of them have European, in particular, Italian roots.


This is the inscription on the paper confirming the debtor is obliged to pay the arranged amount at the arranged place on the arranged day and (if required) interest for using money to the creditor.


This is the guarantee put on the front side of the bill blank. It’s commonly accepted that any signature except ones of a debtor and their creditor is the Aval.

Allonge (Rider)

This is the additional paper for transfer labels.


The procedure of payer’s confirmation of the obligation to pay the arranged amount fully or partly to the drawer. Unaccepted bills are by far less demanded than accepted ones.


Endorsement  – Nuances of Securities Transfer

After the discovery of America and emergence of new seaways in the 16th, the fall of fair took place. As a result, there came the need in enlarging the turnover of promissory notes by means of new procedures. In face, traders needed guarantees for execution of promissory operations with the same rapidness and strictness, as at fairs, but with the condition that an agreement had to have no restrictions of time and place. For realization of such an opportunity, the endorsement was invented, whose motherland is France.
Usually, a bill is ordered security. In other words, any bill has its holder specified. If bill transfer is required, a special order is made, and all the rights of the security are transferred to another person. Such change of right to claim is called endorsement .

endorsement and cessionA bill held through the endorsement  can be transferred to another person through the endorsement  too. And with any next transfer of rights, the current holder must sign papers.
It’s interesting that the person transferring rights through the endorsement , necessarily bears joint and several liability for security obligations fulfillment to all its subsequent holders. That’s why indorsed bills are more commonly used in international transactions than ordinary ones.
Proceeding from the transfer label content, there are types of endorsement s:

  • partial or complete;
  • blank (bearer), special (to a certain person), endorsement by an agent (transfer of the part of rights by attorney);
  • with or without recourse.


Cession – Find 4 Differences!

It’s defined as a legitimate transfer label and means the transfer of property rights to the bill. To realize principal differences between cession and endorsement , you should know that:

  • cession if the double-sided contract, while endorsement is the one-sided order;
  • In the endorsement , the transferring side takes responsibility for the effectiveness and feasibility of property rights; while in cession – only for the effectiveness of them;
  • Cession is the special transfer of rights (that’s why, it is required to meet some procedures regulated by law); endorsement can be bearer (this makes it more attractive when one needs to accelerate transactions);
  • Endorsement is formalized on a blank; cession may be compiled either on the security itself, or as the separate agreement.


Circulation of Bills or the Way to Money

It assumes several stages:

  • The seller delivers goods.
  • The customer formalizes the bill and prepares it for the acceptance in a bank.
  • The bank gives the accepted bill to the customer, and they pay with it to the seller.
  • The seller transfers the bill to their bank.
  • Then, seller’s bank must discount the bill and pay the arranged amount excluding discount rate.
  • The bank of the consumer requires the seller’s bank to return the bill according to the deadline of the transaction.
  • Seller’s bank returns the paid bill.

Trading securities is the real way to acquire financial freedom. Other information about ways to make money at the market where the money itself is the commodity can be found in this article.


Modern Bill Discount: Rules and Features

This is the name of a set of operations carried by a bank when purchasing a bill before the arranged deadline. Usually, this process contains the following stages:

  • The holder transfers rights to the bill they have to the servicing bank through the endorsement ;
  • The bank processes the security and calculates the discount rated being based on its own rates and supposed drawer’s paying capacity;
  • The holder gets the amount arranged in the bill, excluding discount rate.

Here is how the formula used by a bank to calculate the discount rate looks like:
Discount Rate = nominal of the bill * discount rate (%) * days to the deadline * annual period
A holder has the real necessity to present a bill for discounting when they need spare funds, but the arranged deadline hasn’t been reached yet.
There is bill rediscount along with their discount. The former procedure stands for the process when the bank sells deposited securities to another credit institution or the Central Bank.


US Financial Market – Promissory Instruments


There are several promissory instruments at the financial market of the USA:

  • Treasury bills;
  • Discounted bills of federal departments
  • Short-term municipal bonds, tax-free;
  • Commercial papers
  • Bank acceptances
  • Medium-term notes

promissory notesThe most common are the most liquid types of bills – bank acceptances and treasury bills. However, usage of the former decreased by more than 15 times for last 20 years.

Treasury Bills

A treasury bill is the obligation (debt paper) issued by US Treasury every week in order to support budget deficit. The expiration period of this type of bills is from 3 weeks to 6 months. Such papers are sold at weekly auctions and aftermarket. A fixed amount is paid without any interest payments when the debt paper is fulfilled.
Purchases of these promissory notes are banks (mostly). They are the most liquid tools, as trading with them takes place by far more often than with other types of bills. Another attraction for purchases lies in impossibility of default of those papers. Because government is the warrantor of the payment.

Discounted Bills

Their another name is federal securities. They are issued by federal organizations for 3-6 months and sold at aftermarket through dealers. They are less liquid than treasury bills, but are more profitable due to discounts.

Short-term municipal bonds

Issued by authorities of states for 3-12 months and have higher risks than previous two types of promissory instruments. But, their advantage lies in no need to pay the income tax.

Commercial papers

Regularly issued by different enterprises, holdings and financial organizations. They are short-term debt papers of expiration within 30-270 days. It is the popular way of investing spare money for short terms. However, the only guarantee of commercial papers is the reputation of the company issuing them. Also, this type of promissory instruments is the decent alternative for bank loans.

Bank acceptances

They are drafts of corporations accepted by banks and issued for 1-6 months. Bank acceptances are sold at aftermarket and are distinguished by low credit risk, which makes them attractive for buyers. However, due to little discount, they are not the active instrument of the financial market.


Medium-term bills

What is a bill of medium terms? It is a document issued either by banks or by financial or producing companies for 9 months to 10 years. It is the kind of the simple unsecured promissory notes with floating interest rates.

And, for those who prefer the simpler and still profitable method of investing, I recommend the article “The Step-By-Step Instruction for Trading”.


Advantages of Using Bills – Favors of the Obligation

Economists think transactions with bills are profitable for all the sides participating in them. For banks, advantages are in getting fees for selling blanks and excluding discount rates for bill discount.
Moreover, bills are not considered issued securities, so their issuing doesn’t require coordination with state authorities. Therefore, banks can use them as instruments partially similar to deposits. Bill discount will let them fulfill mutual obligations and make money through processing those operation with interest and fee incomes.
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Using bill transactions and providing commodity or commercial loan in this form turns out to be more profitable than the standard loan agreement.
As bills are not supported by the mortgage, the procedure of their bank discount becomes considerably simpler, and the presence of joint and several liability minimizes chances of objections over bills or non-payments.
For enterprises-purchasers, advantages of using bill schemes are in noticeable decrease of need in circulating money and removal of accounting gaps. Promissory notes and drafts are profitable for sellers too: they don’t just get the guarantee of payments for delivered commodities, but also ship goods on credit, which increases their revenue. In international trading, bills are indispensable due to the simplicity of formalizing and opportunity to repeated transfer and discount.

Problems of Using Bill Schemes – Mistakes to Avoid!

Despite of the wide range of advantages, the volume of bill transactions is not that great today. Among the main reasons of such situation, we can mention:

  • The necessity in thorough realization of laws of bill discount by all the deal sides;
  • The absence of legislative framework for swift regulation of the problem of bill non-payment;
  • Real paying capacity and interest for other sides of the deal are the attribute of major issuers’ bills only.


Companies that wish to use promissory notes and drafts for their current transactions, have to examine the legislative framework and enforcement practice of this field to the core. Receiving bills from new counterparties, it’s needed to strictly follow all the laws and make sure this type of payments is optimal for the present situation.


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