When conducting business transactions, bills of exchange are often used to facilitate payment. Two common types of bills of exchange are the trade bill and the accommodation bill. While both are types of negotiable instruments that involve the transfer of money, they differ in their purpose and the parties involved.
A trade bill is a type of negotiable instrument that is used to facilitate the payment for a transaction between two parties. It is usually issued by a seller to a buyer as a means of formalizing the agreement to purchase goods or services on credit. The buyer accepts the bill and agrees to pay the seller either on a specific due date or on demand, as specified in the terms of the bill.
Trade bills are used particularly in domestic and international trade. These bills are an essential part of import-export transactions. In these types of transactions, the buyer agrees to pay the seller within a certain timeframe. In the case of an international transaction, there are usually different currencies involved, so the bill helps to standardize the payment process to avoid confusion and non-payment.
Trade bills are designed to provide security to both parties involved in the transaction. The seller is guaranteed that they will receive payment within a specified timeframe. On the other hand, the buyer can avoid having to pay upfront at the time of purchase and can instead pay after a certain period when the goods have been received or services rendered.
Unlike the trade bill, which is used to facilitate the purchase of goods or services, an accommodation bill is a type of bill of exchange that is used as a form of security. It involves three parties: the drawer, the acceptor and the accommodator. The accommodator is a third party who agrees to lend their name, credit or resources to facilitate the payment of the bill.
An accommodation bill is commonly used in situations where the creditworthiness of the payee is questioned, but the goods or services are crucial, which requires payment even in the absence of immediate payment. This type of bill does not represent an underlying transaction but rather functions as a guarantee from the accommodator that the acceptor will be able to pay the bill when it is due.
In an accommodation bill, the accommodator acts as a guarantor of the payment of the bill. This means that if the acceptor fails to pay the bill, the accommodator will be held responsible for paying it in full. Banks sometimes issue accommodation bills or provide guarantees for clients who have bad credit ratings, which means there is no guarantee that bills will be paid. The bank’s endorsement on a bill guarantees that it will be accepted for payment by the bank.
Difference between Trade Bill and Accommodation Bill
The key difference between trade bills and accommodation bills is their purpose. A trade bill is used to facilitate the payment for the purchase of goods or services, while an accommodation bill acts as a guarantee for payment if the original acceptor is unable to pay. Another difference between the bills is the number of parties involved. Trade bills involve two parties, namely the seller and the buyer, while accommodation bills involve three parties, namely the drawer, the acceptor, and the accommodator.
Another difference between the bills is the use of credit. In the case of trade bills, credit is granted to the buyer by the seller, who expects payment on the agreed-upon due date. In the case of accommodation bills, the accommodator provides credit by guaranteeing that the acceptor will be able to pay the bill when it is due.
Trade bills and accommodation bills also differ in their financial implications. A trade bill represents an underlying transaction and an actual obligation to pay, so if it is not paid, the seller can take legal action to recover the funds. On the other hand, an accommodation bill is not an underlying transaction but a guarantee that a third party will take responsibility for payment if the original acceptor defaults.
In conclusion, while both trade bills and accommodation bills are types of bills of exchange that involve the transfer of money, they differ in their purpose, the parties involved, and the use of credit. Trade bills are used to facilitate the payment for the purchase of goods or services, while accommodation bills act as a guarantee for payment in case the original acceptor is unable to pay. Understanding the differences between the two will help businesses select the right type of bill for their purpose. Always seek legal advice to determine the best course of action when using any type of bill of exchange.