Bill of Exchange: When Do You Use One in Trade?

You use a bill of exchange mainly in documentary collections (D/P and D/A) and when you draw payment under a letter of credit. In a collection no bank guarantees payment, so it suits buyers whose credit you already trust and deals where you want lower bank costs than an L/C.

Key takeaways

• Under Korean law a bill of exchange is valid only if it carries every item listed in Article 1 of the Bills of Exchange and Promissory Notes Act. A bill with no maturity is treated as payable at sight (Article 2).
• Under URC 522 a bill of exchange is a financial document, and banks only pass documents on; they take on no payment obligation.
• D/P releases the documents against payment; D/A releases them when the buyer accepts the bill.

What is a bill of exchange?

A bill of exchange, also called a draft, is a written, unconditional order from the drawer to the drawee to pay a fixed sum to the payee at maturity. In trade the exporter is usually the drawer, and the drawee is the importer in a collection or a bank under a letter of credit.

Article 1 of Korea’s Bills of Exchange and Promissory Notes Act requires the following items:

• the words “bill of exchange” in the body of the instrument, in the language it is written in
• an unconditional order to pay a fixed sum
• the name of the drawee
• the maturity
• the place of payment
• the name of the payee, or of the person to whose order payment is to be made
• the date and place of issue
• the drawer’s name and seal, or signature

If any of these is missing the instrument is generally not valid as a bill of exchange. Article 2 fills some gaps: with no maturity the bill is payable at sight, and with no place of payment or issue, the place shown next to the drawee’s or drawer’s name is used.

What role does a bill of exchange play in a documentary collection?

In a collection the bill of exchange is the financial document the bank presents to the importer to obtain payment or acceptance. The bank acts only on the collection instruction and does not pay if the importer refuses.

Collections run under the ICC Uniform Rules for Collections, URC 522 (1995 Revision). The rules apply only when the collection instruction says so (Article 1). Article 2 separates financial documents (bills of exchange, promissory notes, cheques) from commercial documents such as invoices and transport documents.

• D/P (documents against payment): the importer gets the commercial documents only after paying.
• D/A (documents against acceptance): the importer gets the documents by accepting a time bill (signing to pay at maturity) and pays on the maturity date.

URC 522 Article 7 says a collection should not combine a bill payable at a future date with D/P instructions, and that if a collection with a future-dated bill does not say whether it is D/P or D/A, documents are released only against payment. For the risk comparison, see D/P vs D/A Payment Terms.

How is it different from a letter of credit?

Under a letter of credit the issuing bank promises to pay if the documents comply, while in a collection using a bill of exchange the banks are only intermediaries. A collection usually costs less in bank charges than an L/C, but the exporter carries more of the risk of not being paid.

Many letters of credit also call for a draft. In that case the drawee is the issuing bank or a nominated bank, not the importer: UCP 600 Article 6(c) says a credit must not be issued available by a draft drawn on the applicant. For L/C versus wire transfer, see Letter of Credit vs T/T, and for the L/C steps, see the letter of credit process.

	Collection (D/P, D/A)	Letter of credit
Bank payment undertaking	None	Issuing bank undertakes to pay
Drawee of the bill	Importer	Issuing or nominated bank
Rules	URC 522	UCP 600
Exporter’s risk	Higher	Lower

How do you work out the maturity of a bill payable after sight?

A bill payable a fixed period after sight matures that many days after the importer accepts it. Under Korean law the first day is not counted (Article 73), so you start counting from the day after acceptance.

The example below is hypothetical and only shows the order of the calculation.

• Terms: D/A, 90 days after sight, USD 10,000
• Acceptance date: 1 November
• Maturity: 30 January of the next year, the 90th day counted from 2 November (29 days in November + 31 in December + 30 in January = 90)

Under Article 5, an interest clause may be written only on bills payable at sight or a fixed period after sight; on other bills it is treated as not written. If maturity falls on a legal holiday, payment can be demanded on the next business day (Article 72), so confirm the actual payment date with your bank.

What mistakes do traders make with bills of exchange?

The most common mistakes are leaving out a required item and not stating clearly in the collection instruction whether it is D/P or D/A. Either one can delay the release of documents or lead to terms you did not intend.

• Under URC 522 banks only check that the documents received appear to match the list in the collection instruction; they do not examine the contents (Article 12). The drawer has to check the form.
• Pairing a time bill with D/P instructions can mean, under Article 7, that the importer cannot get the documents until maturity.
• If payment or acceptance is refused, protest and recourse have statutory time limits (Article 44 and related articles), so agree next steps with your bank as soon as you hear of the refusal.

FAQ

Is a bill of exchange also used under a letter of credit?

Yes. Many letters of credit require a draft. The drawee is then the issuing bank or a nominated bank, while in a collection the drawee is the importer.

What happens if the collection instruction does not mention URC 522?

URC 522 applies only when the collection instruction incorporates it. Most banks’ collection forms already include that wording, so check the form you sign.

Can a bill of exchange be transferred?

Yes. As a negotiable instrument it can be transferred by endorsement, unless the drawer has written “not to order” or similar wording or the collection instruction restricts it.

When should you use a bill of exchange collection instead of an L/C?

Use it when you have a trading history with the buyer, trust their credit and want to cut bank costs. For a new buyer or uncertain credit, a letter of credit or payment in advance is safer.

Sources

• Korea Law Information Center, Bills of Exchange and Promissory Notes Act (Articles 1, 2, 5, 44, 72 and 73, in Korean)
• ICC, Uniform Rules for Collections (URC 522, ICC Publication No. 522, 1995 Revision)
• ICC, Uniform Customs and Practice for Documentary Credits (UCP 600, ICC Publication No. 600)
• Related posts: D/P vs D/A Payment Terms, Letter of Credit vs T/T, Letter of Credit process