International Bill of exchange

A bill of exchange is simply a method of settling a debt

If you owe a sum of money to me, say $100, there are various ways in which you can settle that debt

– you could pay me 100 $1 bills cash
– you could offer to send me some asset worth $100
– you could write a cheque for $100 naming me as the payee and instructing your bank to pay my bank so that my bank can then pay that $100 into my bank account
– you could make a payment to me by way of bank transfer
– you could agree to pay me by way of a bill of exchange

In this latter situation, I shall prepare a bill of exchange drawn in my favour (as the payee) and send it to you (as the drawer) asking you to sign it (now you’re the acceptor)

The bill is addressed to your bank (as the drawee) and instructs your bank to pay $100 out of your bank account to the account of the person that presents that document to your bank and asks for payment sometime in the future (often 90 days)

You will mail this signed document back to me and I now have a $100 piece of paper in my hand.

I can sit tight and hold on to it for the 90 days or I could sign the back of the bill (now I’m the indorser) in favour of my own creditor / account payable (who now becomes the indorsee) so that will settle my own debt of $100

The indorsee can, in turn, sign the back of the bill (so now becomes the indorser) in favour of their own account payable (the new indorsee) and so on for 90 days

At the end of that 90 days, the person in possession of that piece of paper (this person is not only the last indorsee, they are also ‘the holder’) presents the bill to your bank and asks for payment

And, hopefully, your bank will draw money from out of your account and pay it into the bank account of the holder

Does that answer you?