Difference Between Promissory Note and Bill of Exchange

By Tanya Gupta

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Updated on: Jul 16th, 2025

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11 min read

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India's business and money system works on trust and proper written records. Some important documents are used to make sure payments are done on time and there is no confusion,. The three main types are promissory note, bill of exchange, and cheque.

This topic focuses on promissory note and bill of exchange. These are commonly used in trade and finance when money is borrowed or payment is delayed. Both are written under the law called the Negotiable Instruments Act, 1881. Knowing about them helps in understanding how legal payments work in business.

What is a Promissory Note?

promissory note is a written paper (kind of agreement) where one person writes that he will pay money to another person. The amount is fixed , like ₹5,000 or ₹10,000. The payment can be made on demand or after a fixed date (depends on what is written).

It also has details like → how much money, when to pay, interest (if written), and signatures. Both the parties involved — the one who gives and the one who takes — must sign it.

Basically, it shows that money is to be paid. That’s why it's important.

Uses of Promissory Note

A promissory note is useful in many cases where money is given from one person to another. It helps to keep things clear. The uses are as follows:

  1. When someone gives a loan to another person, they can write a promissory note.
  2. It shows how much money is to be returned and when.
  3. If there is any fight, it can be used as proof.
  4. People use it so that no one forgets the payment date.
  5. It is also used by shops and business people sometimes.
  6. It can be for small money  or a big loan .

Promissory Note Example

Ravi borrowed ₹10,000 from Suresh and wrote on paper — "I promise to pay ₹10,000 to Suresh on 1st August 2025." He signed it. This is a promissory note.

What is the Bill of Exchange?

A bill of exchange is a written note where one person (called the drawer) tells another person (the drawee) to pay money to a third person (the payee). The amount is already fixed. The payment can be on a fixed date or even on demand.

There are three parties involved in this. The person who writes it,  who has to pay, and who will receive the money.

The drawee has to accept it, otherwise it won’t work properly.

Uses of Bill of Exchange

A Bill of Exchange is used in many monetary and trade situations. Its uses are:

  1. It is used in trade to pay for goods or services after some time.
  2. It gives the seller a written promise from the buyer to pay on a fixed date.
  3. It can be transferred to someone else by signing on the back (endorsement).
  4. The seller can give it to the bank and get money before the due date (discounting).
  5. It works as legal proof if the buyer doesn’t pay.

Bill of Exchange Example

bill of exchange

Example: Bill of Exchange 

Key Differences Between Promissory Note and Bill of Exchange

Here are the main differences between a Promissory Note and a Bill of Exchange:

Aspect

Promissory Note

Bill of Exchange

NatureA promise to payAn order to pay
Parties2 (maker and payee)3 (drawer, drawee, payee)
AcceptanceNot requiredDrawee must accept it
LiabilityMaker is directly responsibleDrawee is liable after acceptance; drawer is liable before
TransferabilityCan be endorsedCan be endorsed
Used byBorrowers (personal or business)Traders (domestic or international trade)
Proof if not paidCan be used in court as proofCan be protested and used in court
DishonorNotice of dishonor not compulsoryNotice of dishonor must be given to the drawer and endorsers
Issued byThe debtor (maker)The creditor (drawer)
Copies allowedNoYes

Similarities Between Promissory Note and Bill of Exchange

Here are the key similarities between a Promissory Note and a Bill of Exchange:

Aspect

Similarity

Evidence of debtBoth are written documents that acknowledge a debt and a promise or order to pay a specific amount. 
Negotiable instrumentsBoth can be transferred to others by endorsement or delivery, making them negotiable.
Essential detailsRequire inclusion of crucial elements like amount, date, payee, and signatures.
Legal frameworkBoth are covered under the Indian Negotiable Instruments Act, 1881.
Court enforceabilityBoth are legally enforceable, allowing holders to take legal action if payment is defaulted.

Frequently Asked Questions

What are the main differences between a promissory note and a bill of exchange?

 A promissory note is a promise by one person to pay another. A bill of exchange is an order from one person to someone else to pay a third person. Promissory note has 2 parties, bill of exchange has 3 parties. Bill needs the drawee to accept, note doesn't. Bill can have copies, notes can't.

What is the difference between a cheque and a promissory note?

A cheque is drawn on a bank, a promissory note is made by a person. Cheque is paid on demand, note can be paid later. Cheque needs no acceptance, promissory note also doesn’t. Cheque can be crossed, note cannot be.

When to use a promissory note?

Use it when someone borrows money and you want a written promise. Good for short and long term loans. It shows amount, date, and maybe interest.

When to use a bill of exchange?

Use it in trade or business when someone needs to pay later. Helpful when buyer and seller are not directly handling cash. It is used when a third party like a bank is involved.

Can a bill of exchange be converted into a promissory note?

Not really. A bill is an order, and a promissory note is a promise. They are different. If a drawee agrees to pay and writes a promise, it becomes like a note but not fully

Can a promissory note be transferred to another party?

 Yes, it can be endorsed and given to someone else.

Is a promissory note safer than a bill of exchange?

 A promissory note is simple and easy. Bill of exchange is more formal and used in big business. Both are legal and useful. One is not always safer than the other. It depends.

About the Author
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Tanya Gupta

Content Writer
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A Chartered Accountant by profession and a content writer by passion, I've dedicated my career to unraveling the complexities of GST. With a firm belief that learning is a lifelong journey, I've honed my skills in simplifying intricate legal jargon into easily understandable content. The satisfaction of transforming complex tax laws into relatable narratives is what drives me. Read more

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