WEEK 12 Notes, Bills and cheques, Parties to instruments negotiation,

What are Negotiable Instruments

In the world of business and finance, negotiable instruments are a very important tool. They provide the parties with an ease of doing business. And they can also be a source of finance when in need of funds. Let us learn more about negotiable instruments and their advantages.

What are Negotiable Instruments?

A negotiable instrument is actually a written document. This document specifies payment to a specific person or the bearer of the instrument at a specific date. So we can define a bill of exchange as “a document signifying an unconditional promise signed by the person giving the promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or time”.

ypes of Negotiable Instruments

Let us take a look at some of the most common types of negotiable instruments.

  • Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally to the creditor (or the bearer of the document) a certain sum of money on a specific date.
  • Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (debtor) to pay the payee a certain amount of money. The bill will be made by the drawer (creditor)
  • Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only payable on demand. It is basically the depositor instructing the bank to pay a certain amount of money to the payee or the bearer of the cheque.
  • Other Negotiable Instruments Examples: There are other instruments such as government promissory notes, railway receipts, delivery orders, etc. These can be negotiable instruments by custom or practice of the trade.

  • Advantages of Negotiable Instrument

  • One of the biggest advantages of bills of exchange is that the consideration between the debtor and the creditor is presumed. So we will assume that the purchaser is in debt of the seller, the seller need not prove this fact. Since, the bill has been accepted by the debtor the court will assume that such debt legitimately exists.
  • The creditor does not have to wait for the maturity period to get the money. He can immediately opt for bill discounting. Or he can endorse the bill to a creditor of his. So, his money does not get locked in.
  • Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet any temporary financial shortfalls that may arise from time in business.