A bill of exchange – what is it?
Currently, securities are the most common type of investment of available funds. Promissory note is one of its methods.
Many users have probably heard the word “promissory note”, but do not know what it means. It is customary to call a promissory note a promissory note confirming the debt of the drawee to the buyer of the bill, which he must repay in a certain period of time. In this situation, the drawee can still be called a debtor who must repay the obligations within the time limit set by him.
This type of securities appeared around the XIII-XIV centuries, at which time this type of mutual settlement was the norm. It was first used in Italy, which was a world trade center. If there was a lack of finance, suppliers were issued promissory notes, which were regarded as a promissory note. The document specified the amount of money and the time of its return. The promissory note was mostly used as a tool for obtaining goods “for sale”.
Today, this document has not lost its relevance. It usually rotates among companies that carry out settlement operations with each other. Companies practically do not issue promissory notes to borrow funds for development from ordinary people. Individuals can also issue promissory notes instead of IOUS, but as a rule, they do not use this opportunity.
The promissory note today is one of the most important financial instruments that performs a number of tasks. First of all, it is considered as a means to obtain a loan. You can use a promissory note to pay for purchased goods or services, return the loan received, or, conversely, provide a loan. Creditors value this document for its formal and material rigor, easy transferability, and quick debt collection.
In addition, the promissory note can be used as security for a transaction. In simpler words, the holder of the bill can receive funds on the bill before the time set in it in two ways, namely, through accounting for the bill in a bank or obtaining a loan secured by this security.
Promissory notes are a monetary settlement tool that can speed them up significantly. Usually, a bill of exchange can pass through several holders before maturity, so it pays off their debts and reduces the need for real money. Note transactions do not require the participation of the bank, which eliminates the need to adapt to its rules and pay mandatory commissions.
What are the nuances of buying a promissory note?
By issuing a promissory note, the debtor undertakes to return the funds with or without remuneration. The difference between a bill of exchange and a receipt is that the conditions on the bill are set by the debtor, not the creditor. This means that it independently sets the amount of interest that it can pay in excess of the debt. A person who wants to buy a bill of exchange also decides for himself whether these conditions are suitable for him or not.
Income as a percentage is placed on the document itself. In all other cases, the document indicates its face value. However, in fact, the bill can be sold at a different value, then the income will be considered the difference between the redemption price of the bill and its face value.
Igor Vasilyevich bought a bill of exchange, which indicated a face value of 100 thousand hryvnia with a maturity in a year. In fact, he paid 80 thousand hryvnias for the bill. This means that a year later his income amounted to 20 thousand hryvnias.
The difference between the actual and nominal value of the bill at the time of purchase is called a discount.
Very often, sellers of promissory notes assure potential buyers that deposits and promissory notes are the same financial products with different names, but they are silent about the existence of certain risks that the purchase of promissory notes carries.
First, a bill of exchange, unlike a deposit, is not insured. This means that if the bank is stripped of its license, its depositors will receive their funds back within the amount established by law. In the case of a promissory note, the situation is somewhat different, even if it was issued by a bank. In simpler words, the bank does not give any guarantees in case of force majeure, since this document does not fall under the deposit insurance system. Promissory note holders are the last in the list of creditors. If the license is revoked, the bank that issued the bill of exchange may simply run out of funds when it reaches debts to them.
Secondly, the bill cannot be repaid in advance. If the deposit can be withdrawn at any time, then this will not work with a bill of exchange, since it indicates a certain maturity date and until then you can not even think about receiving funds.
In addition, income on promissory notes is subject to tax, which will need to be paid to the tax service. Remuneration on bank deposits is subject to taxation only if its level exceeds the limits allowed by law.
The main risk of a bill of exchange is that the lender may simply not be able to return the money paid under the document.
Who issues the promissory note? Any company has the right to issue a bill of exchange, and a fraudulent structure can also use it. For example, such companies may issue promissory notes that are not expected to be refunded, and then disappear. In such a situation, the lender will most likely have to say goodbye to their finances forever.
What does a promissory note look like? Distinguish between promissory note and bill of exchange. Registration of a bill of exchange requires compliance with very strict rules, in particular, it must contain the following banking details::
- heading.It indicates the type of paper-promissory note or transferable.A promissory note is a document in which only the creditor and the debtor participate.A bill of exchange is used extremely rarely, only in cases where a third party is present in the transaction, who undertakes to return the funds to the lender instead of the drawee;
- the amount to be paid is written in numbers and words without corrections.If the bill of exchange provides for remuneration, then the interest must be indicated separately;
- date and place of purchase of the promissory note.If the place of drawing up the bill of exchange is not specified in the document, then it means the address of the debtor;
- maturity of the promissory note.There are several payment options – a specific date and the inscription “at sight”.If everything is clear with the first option, then the second means that the lender can demand repayment of the debt at any time during the year from the date of drawing up the paper.Also, the drawee can specify a certain period of receipt of money.How to understand?For example, “upon presentation, but not earlier than May 5, 2020 and not later than May 5, 2021”.If the term of payment is not reflected in the document, then it is considered that this bill of exchange is redeemed upon presentation;
- the place where the bill of exchange is to be redeemed.If it is not specified, the funds must be issued at the place where the bill was drawn up.If the place of drawing up is also not specified, the payment will be made to the address of the drawee or payer, depending on the type of bill;
- name of the lender.In this paragraph, indicate the full name of the organization or individual, as well as their addresses;
- signature of the debtor.The bill is signed manually.If the document is issued by a company, then it must have its seal, signature of the head and chief accountant.;
- payment details of the drawee.On a promissory note, indicate the full name and location of the legal entity or the full name and address of the person’s registration.On the transfer document, in addition to the details of the drawee, the payer’s data is also indicated.
In the absence of mandatory banking details, the prepared paper loses the right to be called a bill of exchange. The content of the promissory note will play a decisive role when the lender begins the debt collection procedure through the court. You can write out a bill of exchange on any paper, there are no special forms for it.
Each lender has the right to sell a bill of exchange or transfer it to another person. These actions are not considered illegal. On the reverse side of the bill of exchange or a separate sheet of paper, the name and details of the former and new owner of the bill of exchange are indicated. If the bill is transferred to a company or organization, it must be stamped.
The transfer of the promissory note should be treated very carefully. This is due to the fact that next to the name of the previous owner there may be an inscription “no turnover on me”. Such an addition means that this person or company does not assume any obligations on paper to subsequent bill holders. The last owner will demand to repay the debt from the person who first issued the bill. In the case of a bill of exchange, you will need to search for the payer. And this, as practice shows, is not easy to do.
If there are no marks next to the name or designation of the former holder of the bill, then he will be jointly and severally liable with the drawee or payer for repayment of the debt. This means that the bill holder can demand the debt from one of them or distribute it in any proportion between the defendants. Therefore, before you buy this paper, find out who will eventually pay for the bill.
As a rule, a bill of exchange is written out on paper, and it is not stored in electronic form. If the bill of exchange is lost, you will have to prove through the court that it was there. This can be done if you have a contract for the purchase and sale of promissory notes in your hands.
There are situations when the debtor does not want to fulfill the obligations under the bill. What to do? Most likely, you will have to solve this problem with the help of a court. However, before that, you need to issue a bill of exchange protest act with a notary. This document will confirm that the debtor has not repaid the bill of exchange. As a rule, a protest act is drawn up after the debtor refuses the notary’s request to repay the debt.
The judge does not bother with the reasons for non-fulfillment of the terms of repayment of the bill, does not hold meetings and does not listen to the arguments of the parties. He simply sends a court order to the debtor with a demand to repay the bill. If the drawee does not challenge this order within 10 days, it is handed over to the creditor, and he can apply to the bailiffs with it.
If not all the required details were indicated on the bill of exchange and the notary refuses to draw up a protest act for this reason, the creditor can still file a lawsuit against the debtor. In this case, the process will proceed in the general order.
It should be noted that a court decision does not always give the desired result. The debtor or payer may simply be bankrupt.
Does it make sense to buy a bank bill?
A promissory note is a completely legal financial instrument. However, there are many nuances in handling it, because of which its acquisition can bring losses.
If you do not want to delve into all the subtleties of promissory notes, it is better to give preference to simpler ways of investing funds, in particular bank deposits. When opening a deposit, carefully read the terms of the agreement to be sure that you are actually making a deposit, and not something else.
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