Bills of exchange are a popular form of buy now, pay later (BNPL) for business-to-business (B2B) transactions. How do they work and why are they so popular? This article will answer the most common questions you may have about bills of exchange and look at their advantages and characteristics.

What’s in this article?

• What are bills of exchange and what are they used for?
  
• Who can issue bills of exchange?
  
• Why use bills of exchange?
  
• How do bills of exchange work?
  
• What information should be included?
  
• What is the difference between a bill of exchange and an electronic bill of exchange?
  
• What is the difference between a bill of exchange and a bank check?
  
• Advantages of bills of exchange
  
• Disadvantages of bills of exchange
  
• Bill of exchange template
  
• What are the alternatives to the bill of exchange?
  

What are bills of exchange and what are they used for?

Bills of exchange, which are also known as drafts, are commercial bills issued by a supplier instructing a customer to pay for the purchase of goods or services at a later date (with the due date indicated). They are a formal agreement of delayed payment terms between the supplier and customer.

The practice of issuing bills of exchange dates back to the Middle Ages. The supplier (the party issuing the draft) is sometimes called the “drawer,” while the business customer is called the “drawee” (the party receiving the payment order).

Who can issue bills of exchange?

Bills of exchange can only be used in B2B transactions. This BNPL solution is commonly used for trade in France and abroad.

Why use bills of exchange?

Bills of exchange are payment orders guaranteeing payment to the supplier once signed by the customer. The business customer benefits from the payment terms set by the creditor (the supplier) and receives goods or services without having to pay immediately. Bills of exchange therefore bind the two businesses until the due date set by the supplier.

How do bills of exchange work?

Bills of exchange are payable through a bank. The supplier first creates their bill of exchange and sends it to the customer with the invoice. By signing, the customer accepts the deferred payment and acknowledges their debt to the supplier. The supplier must then endorse it with their signature and account number before handing it over to their bank. They must also complete the bill of exchange remittance slip. On the due date, the supplier’s bank collects the amount due from the business customer’s bank.

What information should be included?

Articles L511-1 to L511-81 of the French Commercial Code state that bills of exchange must include:

• The words “lettre de change” (“bill of exchange”)
  
• An unconditional order to pay the specified amount (written in numbers and letters)
  
• The drawee’s name
  
• The due date
  
• The place of payment
  
• The drawer’s name
  
• The creation date of the bill and its place of issue
  
• The drawer’s signature
  

The drawee’s bank details can also appear on a bill of exchange, although this is not required by law.

What is the difference between a bill of exchange and an electronic bill of exchange?

Electronic bills of exchange are the paperless version of bills of exchange. Standardized by the French Committee for Banking Organization and Standardization (CFONB), they are completed online by the supplier and uploaded to their bank, and then to the customer’s bank. You can find out more about electronic bills of exchange in our article on the subject.

What is the difference between a bill of exchange and a bank check?

The funds to cover bills of exchange only need to be available on the due date. In contrast, bank checks must be provisioned when they are signed. In addition, bills of exchange may bear interest, which is prohibited in the case of payment by bank check.

Advantages of bills of exchange

Bills of exchange offer many benefits to both parties. The business customer benefits from deferred payment terms, while the supplier benefits from a payment order guaranteeing them the funds later. The payment terms allow the customer to set aside funds, allowing them to continue to develop their business while reducing the risk of default.

If desired, the supplier can have the bill of exchange discounted (i.e., receive the funds immediately) by their bank for commission.

Disadvantages of bills of exchange

Bills of exchange have several disadvantages for the supplier. First, the supplier is not paid at the time of delivery or performance: the payment terms can therefore cause cash flow problems if poorly managed. Second, bills of exchange may remain unpaid on the due date. In the event of nonpayment, the supplier must consult a notary or bailiff to draw up a protest.

A protest is an official document the supplier uses to declare to the commercial register that the customer has not honored their payment by bill of exchange. The customer’s name is thus entered in the public protest record, which may adversely affect their rating with the Banque de France and future transactions or negotiations.

Bill of exchange template

Nowadays, electronic bills of exchange (the paperless version of bills of exchange) are used much more widely, and are processed by completing an electronic file with your bank. To create a paper bill of exchange, use this bill of exchange template.

What are the alternatives to the bill of exchange?

There are many payment alternatives to the bill of exchange: bank checks, bank debits, bank transfers, installments, payment vouchers, bank drafts, and payment cards. You can find out more about all the different payment methods in our dedicated guide.

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