Kinds of Negotiable Instruments: Promissory notes, Bills of exchange and Cheques

Negotiable instruments are written documents that promise or order payment of a specific amount of money. They can be transferred from one person to another, and the holder in due course gets full rights to receive payment. These instruments help traders, banks and individuals conduct financial transactions smoothly. Negotiable instruments reduce the need for carrying cash and provide legal protection under the Negotiable Instruments Act 1881. They play an important role in credit transactions and business deals. The main kinds of negotiable instruments are promissory notes, bills of exchange and cheques.

• Promissory Note

A promissory note is a written promise made by one person to pay a definite amount of money to another person. It contains the unconditional undertaking of the maker to pay either on demand or on a fixed future date. The document clearly mentions the name of the maker, name of the payee, amount payable and date of payment. There should be no conditions attached to the promise. A promissory note is signed by the maker and serves as strong evidence of debt. It is commonly used in trade, loans and financial agreements. The holder of a promissory note can transfer it to another person which makes it flexible and useful in business.

• Bill of Exchange

A bill of exchange is a written order made by the drawer instructing another person called the drawee to pay a certain amount to a third person called the payee. It involves three parties which makes it different from a promissory note. The bill must be accepted by the drawee before payment. It can be payable on demand or after a fixed time. Bills of exchange are widely used in trade because they help buyers and sellers carry out credit transactions safely. The bill also provides a legal right to the holder in case of non payment. It can be transferred to others which supports smooth movement of funds in business.

• Cheque

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p style=”text-align: justify;” data-start=”2047″ data-end=”2689″>A cheque is a written order given by a bank account holder to the bank to pay a specified amount to a person named in the cheque. It is always drawn on a bank and payable on demand. Cheques are widely used for everyday payments, business transactions and salary payments. They are safer than carrying cash because the bank verifies signatures and maintains records. Cheques can be of different types such as bearer cheques, order cheques and crossed cheques. Crossing a cheque increases safety by directing the bank to deposit the amount only into a bank account. Cheques also support quick and convenient settlements in the financial system.