Cheques and bills of exchange are two important negotiable instruments used in banking and commercial transactions. Although both are designed to facilitate payments, they differ in their legal structure, parties involved, purpose, and method of operation. Understanding these differences is essential for students of business law, banking, finance, and commerce, as well as for businesses that regularly use negotiable instruments.
This article compares cheques and bills of exchange by explaining their definitions, major differences, similarities, practical applications, and legal significance.
Why is it Important to Understand the Difference?
Understanding the difference between a cheque and a bill of exchange helps individuals and businesses choose the appropriate negotiable instrument for different financial transactions. Since each instrument serves a distinct commercial purpose and follows different legal rules, recognising these differences reduces confusion and supports more effective financial and business decision-making.
Example:
A retailer pays a local supplier immediately by issuing a cheque from its business bank account.
In another transaction, a manufacturer sells goods to a wholesaler on 90-day credit and draws a bill of exchange, which the buyer accepts and agrees to pay on the due date.
This example demonstrates that cheques are commonly used for immediate payments, while bills of exchange are often used to support credit transactions.
Cheque vs Bill of Exchange
| Feature | Cheque | Bill of Exchange |
|---|---|---|
| Drawee | Always a bank | May be any person or organisation required to make payment |
| Payment | Payable on demand | May be payable on demand or at a future date |
| Acceptance | Generally not required | Often required for bills payable at a future date, depending on applicable law |
| Purpose | Banking and everyday payments | Commercial and trade transactions |
| Dishonour | Usually due to insufficient funds or other banking reasons | May occur if the drawee refuses acceptance or payment, depending on the circumstances |
Difference between Cheque and Bill of Exchange
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DRAWEE
A cheque is drawn only on the bank in which the drawer has his account. But the bill of exchange can be drawn on any person including a bank.
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ACCEPTANCE
In case of cheque, there is no need of getting accepted by the bank prior to its presentation for payment. But a bill of exchange is first accepted by the drawee and after that, it can be presented for payment.
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PAYABLE ON DEMAND
A cheque is always payable on demand. When the cheque is presented for payment, the banker is bound to make payment if other requirements are fulfilled.
But a bill of exchange is not necessarily payable on demand. It is for a fixed period, it can be presented for payment after the expiration of the certain period.
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CROSSING
A cheque can be crossed to secure payment. But the exchange cannot be crossed.
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DISCOUNTING
A cheque cannot be discounted. But in case of a bill, if the holder of bill needs money before the maturity, he can get it discontented and can receive the payment to fulfill his needs.
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IMPORTANCE
A cheque is a more common and usable instrument than a bill of exchange. So the cheque is more important than the bill of exchange.
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NOTICE OF DISHONOUR
If the cheque is dishonored, there is no need for notice of dishonor to the drawer by the holder of the instrument.
But when a bill of exchange is dishonored, the notice of dishonor must be given to the drawer.
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DISCHARGE FROM LIABILITY
The drawer of the cheque is not discharged from liability if it is delayed to present the cheque for payment.
But if the holder of the bill of exchange does not duly present it for payment, the drawer is discharged from liability.
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GRACE DAYS
A cheque is always payable on demand. Therefore, no days of grace are allowed to the banker for payment.
In case of a bill of exchange, the drawee is entitled to have three days for making payment of the bill and these extra days are known as grace days.
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STOPPING THE PAYMENT
In case of cheque, the drawer can order the bank not to make payment of the cheque, prior to its presentation for payment but the drawer of the bill cannot stop the payment.
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INSETS
A cheque is drawn on the printed form issued by the bank and is only in one copy. But a bill of exchange particularly a foreign bill is issued in sets.
Similarities between Cheque and Bill of Exchange
| Similarity | Explanation |
|---|---|
| Negotiable Instrument | Both are recognised as negotiable instruments under applicable law |
| Written Instrument | Both must be in writing |
| Payment of Money | Both relate to the payment of a specified sum |
| Commercial Use | Both facilitate financial and commercial transactions |
| Transferability | Both may generally be transferred according to legal requirements |
When Is Each Instrument Commonly Used?
Cheque
A cheque is commonly used for:
- Paying suppliers
- Paying salaries
- Settling invoices
- Withdrawing money from a bank account
- Personal and business payments
Bill of Exchange
A bill of exchange is commonly used for:
- Credit sales
- Domestic trade transactions
- International trade
- Business financing arrangements
- Documenting deferred payment obligations
Frequently Asked Questions (FAQs)
What is the main difference between a cheque and a bill of exchange?
A cheque is a bill of exchange drawn on a bank and generally payable on demand, whereas a bill of exchange may be drawn on various parties and can be payable either on demand or at a future date.
Does a cheque require acceptance?
Generally, no. A cheque is typically payable on demand without formal acceptance by the bank.
Can a bill of exchange be payable in the future?
Yes. Bills of exchange are commonly used for deferred or credit payments.
Which instrument is mainly used in banking?
Cheques are primarily associated with banking transactions, while bills of exchange are widely used in commercial and trade finance.
Are both negotiable instruments?
Yes. Both are recognised as negotiable instruments, subject to the applicable legal framework.
Conclusion
Cheques and bills of exchange are both valuable negotiable instruments, but they are designed for different commercial purposes. A cheque is primarily a banking instrument used for immediate payment from a bank account, whereas a bill of exchange is commonly used to document payment obligations in trade and credit transactions. Understanding these distinctions helps businesses, students, and financial professionals select the most appropriate instrument for a particular situation.
Although electronic payment systems have reduced the everyday use of some paper-based instruments, cheques and bills of exchange remain important concepts in business law, banking, and commercial finance. A clear understanding of their similarities and differences provides a solid foundation for studying negotiable instruments.
See Also: Reasons to Choose Paperless Payday Loans
