In normal course of business, companies own account receivables. It’s the money to be received in future against the supplies made on credit. The seller draws a bill on the buyer with the details like when would the cost of goods or services be paid and on what future date, and gets it endorsed by the buyer. Now the seller can sell this bill to a third party at a discount to the value specified on the bill. This is called ‘Bill of exchange’.
These bills can be endorsed by a bank to increase its credit worthiness. A bill of exchange just signed by the buying party is called ‘trade bill’.The one endorsed by a bank is called ‘bank of eligible bill’. They are discounted by banks, corporates and financial institutions.
A bill of exchange is a negotiable instrument just like a promissory note. The only difference is it’s transferable. It can change many hands in its short life.Bills of exchange are not popular in U.S, but are famous in Europe.
A similar concept called ‘securitization’ is very popular in U.S and other parts of the world. Securitization is the process of making illiquid assets to tradable ones. We will discuss in detail about securitization.
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Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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What is ILR?