Bill of Exchange (Draft) in Collections and Letters of Credit

The bill of exchange in export trade: parties, mandatory elements, sight and usance tenors, acceptance and aval, D/P and D/A, and drafts under L/Cs.

The bill of exchange — or draft — is the oldest financial instrument of trade, and still a working tool for exporters. In a documentary collection it is how you demand payment and, if you grant credit, how the buyer formally commits to pay on a given date. Under many letters of credit, it is the instrument through which the bank pays or accepts. And once accepted, it can be discounted or forfaited to turn a 90-day receivable into cash today.

This lesson explains what a bill of exchange is, who its parties are, which elements it must contain, how tenors are written, how it works in D/P and D/A collections and under letters of credit, and the mistakes that make banks return drafts unpaid.

What is a bill of exchange?

A bill of exchange is a written, signed and unconditional order by which one person (the drawer) instructs another (the drawee) to pay a determinate sum of money to a third person (the payee) or to their order, at sight or at a fixed or determinable future time. Two legal traditions govern it: the Geneva Uniform Law on Bills of Exchange and Promissory Notes of 1930, followed by the commercial codes of many civil-law countries, including France and the Maghreb countries; and the Bills of Exchange Act 1882 in the United Kingdom and the common-law systems derived from it. The essentials are the same in both.

The bill is abstract and negotiable: once accepted, the acceptor's obligation to pay does not depend on disputes about the goods, and the bill can be transferred by endorsement to a bank that discounts it.

Who are the parties?

What must a bill of exchange contain?

Under the Geneva model, a bill must contain: the term 'bill of exchange' in the body of the text, in the language of the instrument; an unconditional order to pay a determinate sum; the name of the drawee; the time of payment; the place of payment; the name of the payee; the date and place of issue; and the drawer's signature. If the time of payment is missing, the bill is payable at sight; if the place of payment or issue is missing, the places next to the drawee's or drawer's name apply. In practice, an export draft looks like this:

Drafts under collections and credits are often issued in a set of two ('first' and 'second of exchange'): payment of one cancels the other, and each is sent by a separate courier to guard against loss.

Sight and usance: how is the tenor written?

'After sight' leaves the maturity in the buyer's hands, since it runs from the day it accepts; 'after bill of lading date' fixes it from shipment and is more common in exports. Whatever the wording, the maturity must be determinable from the draft and the documents: write the reference date in the tenor ('60 days after bill of lading date 14 April 2026') or state the maturity date.

The bill of exchange in documentary collections

In a documentary collection, under the ICC Uniform Rules for Collections (URC 522), your bank sends the documents and the draft to the buyer's bank with a collection instruction.

• Documents against payment (D/P): you draw a sight draft on the buyer; the collecting bank releases the documents only when the buyer pays.
• Documents against acceptance (D/A): you draw a usance draft; the collecting bank releases the documents when the buyer accepts the draft, and presents it again for payment at maturity.

URC 522 states that collections should not contain bills payable at a future date with instructions to release documents against payment; if they do, the collecting bank releases the documents only against payment. The collection instruction must say whether the bank should protest for non-acceptance or non-payment; without instructions, the bank has no obligation to protest.

An accepted bill is a stronger claim than an unpaid invoice: in most legal systems it gives access to fast-track enforcement procedures, and its holder does not have to prove the underlying sale. Adding the aval of the buyer's bank turns it into a bank risk that your bank can discount without recourse — the basis of forfaiting (see trade finance).

Worked example: a D/A draft for glass bottles to Bari

An Algerian glassworks sells 216,000 glass bottles to an Italian olive oil bottler in Bari, CFR Bari, Incoterms® 2020, for EUR 86,400.00 (EUR 0.40 per bottle). Payment: documents against acceptance, draft at 60 days after bill of lading date, with the aval of the buyer's bank.

1. The goods are loaded at Annaba; the bill of lading is dated 14 April 2026.
2. The exporter draws draft BE-2026-061 on the buyer for EUR 86,400.00 at '60 days after bill of lading date 14 April 2026', to its own order, and endorses it to its bank.
3. The remitting bank sends the draft, invoice, packing list, full set of bills of lading and certificate of origin to the buyer's bank in Bari, with instructions: release documents against acceptance and aval; protest if not accepted.
4. The buyer accepts the draft ('Accepted, payable on 13 June 2026 at [bank]', signed), its bank adds its aval, and the buyer takes the documents to collect the goods.
5. The accepted, avalised draft is returned to the exporter's bank, which discounts it at once, or holds it and collects EUR 86,400.00 on 13 June 2026.

Drafts under letters of credit

When a credit requires a draft, ISBP 821 and UCP 600 set the checks:

• Drawee: the bank stated in the credit. A credit must not be issued available by a draft drawn on the applicant (UCP 600 article 6(c)); if the credit nonetheless asks for one, it is only an additional document.
• Drawer: the beneficiary, signed; the name must match the credit.
• Amount: the amount demanded under the presentation, not exceeding the credit, normally equal to the invoice; if words and figures both appear and conflict, the amount in words is examined as the amount demanded.
• Tenor: as in the credit, with a maturity that can be determined from the draft and the documents (for example the on board date of the bill of lading).
• Corrections: any correction must appear authenticated by the drawer.
• Endorsement: if the draft is payable to the beneficiary's order, endorse it when required.

How credits are structured — by payment, deferred payment, acceptance or negotiation — is explained in letters of credit explained.

Common mistakes

• Drawing the draft on the applicant when the credit says it must be drawn on the bank.
• A draft amount different from the invoice amount, or exceeding the credit.
• Words and figures that do not agree.
• A tenor that does not match the credit ('60 days after sight' instead of '60 days after bill of lading date').
• Forgetting the reference date, so the maturity cannot be determined.
• Unsigned drafts, or signed by someone without authority.
• Instructing D/P with a usance draft, which confuses the collecting bank and delays release.

Putting it into practice

On Incoforms, the bill of exchange is generated from the shipment and its invoice: drawer, drawee, amount in figures and in words, tenor, reference date and invoice number are filled in from the same data, numbered from the shipment reference and signed with your stored signature and stamp. You can produce the first and second of exchange and add them to the merged PDF of documents sent to your bank.