Have you ever needed to make a payment without using cash or card? Negotiable instruments are financial instruments that offer a different payment method. This Business Kitz blog will highlight all the types and features of negotiable instruments, allowing you to choose the payment type that suits your needs.
A negotiable instrument is a financial instrument, such as a cheque, bill of exchange or promissory note, that is transferable by endorsement or delivery and can be used as a means of payment. In Australia, negotiable instruments are regulated by the Uniform Commercial Code and governed by common law. They can be used as a secure form of payment and provide a means for businesses and individuals to transact with each other. The acceptance, transfer and negotiation of negotiable instruments are governed by strict rules and procedures to ensure their validity and security.
What are the types of negotiable instruments?
Negotiable instruments are financial instruments that are transferable from one person to another, allowing you to take control of how you manage your businesses finances. They include checks, promissory notes, and bills of exchange. These instruments have several key features, including negotiability, transferability, and endorsement. Negotiability means that they can be bought and sold in a secondary market and are treated as a form of currency.
Transferability means that they can be easily transferred from one person to another, making them a convenient form of payment. Endorsement allows the holder of a negotiable instrument to transfer it to someone else by signing it over to the new owner. These features make negotiable instruments a flexible and convenient form of payment and a valuable tool in the world of finance.
The following are the types of negotiable instruments:
- Bank Drafts
- Cheques
- Money Orders
- Promissory Notes
- Bill of Exchange
- Certificates of Deposit
- Treasury Bills
Bank instruments
A bank draft is a secure, guaranteed form of payment issued by a bank on behalf of a customer. It functions similarly to a check, but is considered to be more secure as the funds are guaranteed by the issuing bank.
A cheque is a written, dated and signed instrument that directs a bank to pay a specified sum of money to a payee. It is a popular form of payment and widely used in day to day transactions.
A money order is similar to a check but is issued by a post office, a money transfer service or a bank. It functions as a prepaid and guaranteed form of payment and is commonly used for transactions where the sender wants to guarantee payment, but does not have a checking account.
A certificate of deposit (CD) is a type of savings account offered by banks and financial institutions. It is a low-risk investment that offers a fixed rate of return for a set term.
Debt instruments
Promissory Notes are a type of debt instrument that serve as an enforceable promise to repay a specified sum of money on a specified date or on demand. They are often used for personal or small business loans and usually signed by the borrower and sometimes a co-signer. Promissory notes often include details such as the amount of the loan, interest rate, repayment terms and consequences of default.
Bill of Exchange, also known as a draft, is a written order from one party to another party directing the latter to pay a specified sum of money to a third party. It is typically used in international trade as a way of transferring funds from one country to another. The person ordering the payment (drawer) writes the Bill of Exchange and the person being directed to make the payment (drawee) is required to pay the specified sum to the third party (payee). If the drawee fails to make the payment, the drawer may take legal action to enforce payment.
Government securities
Treasury bills are short-term debt securities issued by the government to finance its expenditures. They have a maturity of less than one year and are sold at a discount to their face value. They are considered low-risk investments as they are backed by the government’s full faith and credit. The holder receives the face value of the bill at maturity, making them a popular choice for short-term savings and investment goals
Examples of negotiable instruments
The first example is a promissory note. A promissory note is a written promise to pay a specific amount of money to a specified person or entity on a specific date or at a specific time. Promissory notes are commonly used by individuals or companies to borrow money. For example, John may need a loan to start a business, so he writes a promissory note to his friend, Jane, promising to repay the loan with interest on a specific date. In this case, John is the maker of the promissory note and Jane is the holder. The promissory note is a negotiable instrument because Jane can transfer the ownership of the note to another person by endorsing it.
The second example is a cheque. A check is a written order to a financial institution, such as a bank, to pay a specified amount of money to a person or entity. Cheques are commonly used for everyday transactions, such as paying bills, purchasing goods and services, or transferring money. For example, Sarah wants to pay her electric bill, so she writes a cheque to the electric company for the amount owed. In this case, Sarah is the drawer of the cheque and the electric company is the payee. The cheque is a negotiable instrument because the electric company can endorse the cheque and deposit it into their account or transfer it to another person.
Negotiable instruments are therefore an essential part of the financial system and are widely used for borrowing, lending, and making payments. Promissory notes and cheques are just two examples of negotiable instruments in use, and they serve as a reliable means of exchanging money and settling debts.
Legal Advice
It is important that you understand the regulations governing negotiable instruments. If you need any assistance, our sister company, Legal Kitz can assist you. To arrange a FREE consultation with one of their highly experienced solicitors, or contact us at info@legalkitz.com.au or 1300 988 954.
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