Bills of Exchange: Meaning, Advantages and Disadvantages

Bills of Exchange

A bill of exchange is an unconditional order in writing addressed by 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 by 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

1. Risks of default are minimum
2. Faster means of raising finance (if drawer is credible)
3. Highly negotiable / liquid investment
4. Does not require security
5. Does not affect the gearing level of the company
6. Unconditional and can be invested flexibly.
7. Useful as a source of finance to finance working capital
8. Used without diluting capital.

Disadvantages of Bills of Exchange

1. Funds are limited.
2. Market is impersonal because a bill of exchange can be re-discounted many times before they reach maturity.
3. Can be availed only by large companies