Difference Between Promissory Note and Bill of Exchange

Difference Between Promissory Note and Bill of Exchange

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Updated on Feb 26, 2024 14:03 IST

In the world of trading, two of the most common negotiable tools are promissory notes and bills of exchange. Many of us might think these two negotiable tools are the same. But, in reality, it’s not the case. There is a lot of difference between promissory note and bill of exchange.

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So, are you aware of the difference between promissory note and bill of exchange? If not, then don’t worry. You are at the right place. This article will discuss the difference between promissory note and bill of exchange.

The main difference between promissory note and bill of exchange is that a promissory note is a simple written promise between two parties. In contrast, a bill of exchange is a written order that involves three parties.

Before we move further and explore the differences in-depth, let’s go over the list of topics listed under the table of contents (TOC) that we will cover in this article. Here’s the table of contents (TOC):

Table of Contents (TOC)

Difference Between Promissory Note and Bill of Exchange 

For a better understanding, let’s explore the difference between promissory note and bill of exchange in a tabular format. Here’s the table:

Benchmark Promissory Note Bill of Exchange
What is it? It is a simple written promise between two parties. It is a written order that involves three parties.
Issued by Debtor Creditor
Parties involved Two parties: maker/drawer and the payee Three parties: drawer, the drawee and a payee.
Can it have copies? No. Yes.
Section It is mentioned in section 4 of the Negotiable Instruments Act, 1881. It is mentioned in section 5 of the Negotiable Instruments Act, 1881.
Drawer’s liability is Primary and absolute Secondary and conditional
Can the payee and maker be the same person? No. Yes.
Dishonor No notice is served in the event of dishonoring the negotiable tool. Notice is given to all the parties involved in the event of dishonoring the negotiable tool.

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What is a Promissory Note? 

Promissory Note Definition: A promissory note is a simple written promise between two parties. 

In layman’s terms, a promissory note is a written promise made by one party (the borrower or maker) to pay a certain amount of money to another party (the lender or payee). The sum is paid on a specific future date or demand, as stated in the negotiable tool (promissory note).

For more information, you can also explore: Promissory Note: Definition, Types, Characteristics, Pros and Cons

To understand a promissory note, let’s go through an example in the next section.

Example of a Promissory Note 

Suppose, due to a certain emergency, you asked for financial help from one of your friends. He agrees to help you by lending you an amount you have requested, for example, say ₹50,000. You write a promissory note promising him to repay the amount after one month, to be more precise, on 03/03/2023.

The promissory note will act as a record of the loan agreement while also consisting of all the terms and conditions of the loan that you and your friend may have agreed on. The agreement may include details related to the loan, such as the total amount borrowed, interest rate, repayment date or schedule, etc.

What is a Bill of Exchange 

Bill of Exchange Definition: A bill of exchange is a written order that involves three parties.

In layman’s terms, a bill of exchange is a written order from one party (the drawer) to another party (the drawee) to pay a certain amount sum of money to another party (the payee). The sum is paid on a specific future date or demand, as stated in the negotiable tool (bill of exchange). In most cases, the drawer and the payee are the same entities.

For more information, you can also explore: Bill of Exchange, All You Need to Know

To understand a bill of exchange, let’s go through an example in the next section.

 

Example of Bill of Exchange 

Suppose you are the owner of a manufacturing plant that produces soft toys. A company in another country has recently contacted you to produce 1000 pieces of specific soft toys. You accepted the deal and decided to use the bill of exchange to secure payment.

The manufacturer (the drawer) will write a bill of exchange, ordering the buyer’s company (drawee) to pay the agreed-upon sum of money to the payee, which is the manufacturer itself, i.e., you. The bill of exchange here acts as a guarantee of payment and reduces the risk of non-payment.

Key Differences Between Promissory Note and Bill of Exchange 

Here are the key differences between promissory note and bill of exchange:

  • A creditor issues a Bill of exchange, but a debtor issues a promissory note.
  • A promissory note is a written promise, whereas a bill of exchange is a written order.
  • The promissory note allows no copies, whereas a bill of exchange can have multiple copies.
  • Three parties are involved in a bill of exchange, but a promissory note only involves two parties.
  • It is not necessary to serve a notice in the event of dishonoring a promissory note. It is necessary to serve a notice in the event of dishonoring a bill of exchange.
  • The payee and drawer/maker can be the same person regarding a bill of exchange. In contrast, this cannot happen in terms of a promissory note, as only two parties are involved.
  • Section 5 of the Negotiable Instruments Act 1881 mentions the bill of exchange. In contrast, section 4 of the Negotiable Instruments Act 1881 mentions a bill of exchange.

Conclusion

In this article, we have explored what promissory note and bill of exchange tools are. We have also explored the difference between promissory note and bill of exchange in detail, along with their respective examples for better understanding.

If you have any queries related to the topic, please feel free to send your queries to us in the form of a comment. We will be happy to help.

Happy Learning!!

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FAQs

Which parties are involved in a bill of exchange?

The parties involved in a bill of exchange are the drawer (the one issuing the order to pay), the drawee (the party who is ordered to pay), and the payee (the party to whom the payment is to be made).

What is the nature of liability in a promissory note?

On a promissory note, the liability is primary and unconditional. The note maker is liable to pay the specified amount to the payee.

Can a promissory note be transferred?

Yes, a promissory note can be transferred by endorsement, where the payee endorses the note to another party, making them the new note holder.

How is payment made in a promissory note and a bill of exchange?

In a promissory note, the maker makes the payment directly to the payee. In a bill of exchange, the drawee makes the payment to the payee upon the bill's maturity or acceptance.

Is acceptance required in a bill of exchange?

Yes, acceptance is required in a bill of exchange. The drawee must accept the bill by signing it, indicating their willingness to make the payment on the specified date.

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