Promissory notes of commercial banks: features, accounting. A bill of exchange is

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Promissory note is considered one of the main instruments of credit and settlement operations. Its appearance is associated with the need to transfer money from one region to another and to exchange coins for foreign currency. After reading today's article, you will delve into the main features of a promissory note loan.

Key Concepts

It should be understood that a promissory note is a special kind of securities issued by an enterprise. In the future, they can be sold to legal entities or individuals. Such operations allow the issuing company to receive the missing amount of money.

Each bill has a strictly defined repayment period. This means that the owner of the securities may, at a predetermined time, demand their exchange for previously invested funds. In addition, such transactions provide for the payment of monetary rewards. At its core, a bill of exchange loan is nothing more than a kind of purchase and sale transaction. Interest rateon a loan correlates with the term of the securities. In addition, the agreement concluded with such lending contains all the information about the timing of the full repayment of the debt.

Types of bills

Today, two main types of such securities are issued. A promissory note is a document containing a requirement to return a specified amount of money within a strictly specified time frame. Transferable implies the reimbursement of funds in favor of a certain third party.

The period for which the registration and issuance of securities is carried out largely depends on the agreements between the borrower and the lender. Usually this period varies from three to twelve months. Long-term bills are issued for more than a year.

Main Features

It should be noted that the conditions under which promissory notes are issued are more favorable than standard cash loans. The main features are the short-term nature of such loans. They usually have a maturity of less than one year.

Also, even before the end of the loan agreement, the borrower must transfer to the bank a commission payment and cash compensation for the received securities. In addition, all these payments are made at a time.

The amount of commission on a promissory note loan does not depend on how the amount of the loan has changed throughout the entire period. In other words, in this case, there is no amortization of the loan at all.

According to the contract concludedwhen applying for such a loan, the date of repayment of the loan does not coincide with the day of repayment of the bill. This should happen a little earlier.

Design mechanism

All current bill credits are divided into two main groups. The first includes bearer, including accounting and pledge. They are accepted by banking institutions from a client, which is a legal entity, issuing a certain amount in return. The second includes bill loans, in which securities are used as collateral.

Legal entities that have passed all the procedures provided by the bank receive a loan to purchase a bill. With the help of this security, the company pays its supplier for the products sold.

After selling the goods and receiving funds, the legal entity returns to the bank the previously taken amount, together with the interest accrued on it.

With the help of a bill of exchange remaining in the ownership of the supplier, the latter has the right to settle accounts with its counterparties. He can also return the securities to the bank and receive a certain amount for them.

Accounting for bank bills of exchange is that the borrower transfers securities by endorsement before the due date for them and receives in return a fixed amount minus a certain percentage, called a discount.

Benefits

The existence of such loans has a positive effect on the state of the financial and economic system. One of the main advantages,which commercial bank bills of exchange have, it is considered that there are opportunities for a significant increase in the volume of purchased goods by reducing the cost of loans and increasing deferred payments.

Companies that use securities to settle accounts with their suppliers are en titled to a VAT refund on products received. In addition, such transactions make it possible to minimize the risk of non-payment, since all responsibility for bills of exchange is shifted to the banking institution that bought them. Making such a loan, as a rule, is carried out according to a simplified procedure.

It is also important that mutual settlements made using highly liquid promissory notes can significantly reduce the interest rate for commercial loans provided by product suppliers. This is because such securities can be treated as cash.

Flaws

Despite all the above advantages, bill loans have several significant disadvantages. To date, there are a number of objective reasons that reduce the popularity of this financial instrument. Initially, such loans involve significant financial costs on the part of the borrower. It should be understood that the client loses his own funds not only due to the discount, but due to accrued bank interest.

As for the creditor company, the issuance of such a loan also implies the presence of a considerable number of negative factors. The main one is consideredthe occurrence of risky situations leading to the protest of securities and large sums of money that were legally reserved. But, despite all the shortcomings that bill loans have, you should not completely abandon this financial instrument. This is especially true in those situations when it comes to promissory notes characterized by a high degree of activity.