It is fascinating how logistics revolves around pieces of papers, even with technology advancements woven into our lives, documents such as the bill of exchange and the bill of lading are still very prominently used every day. One to facilitate trade, while the other to represent a document of title. With so many documents at play, each with specific role and function, one can be confused of the difference between a bill of exchange and a bill of lading.
A Bill of Exchange is an endorsed document that a seller/drawer issues to the buyer/drawee as a promise to pay a nominal amount of money at an agreed date at the future, whereas a bill of lading serves as a shipping document that a shipping carrier or freight forwarder issues to the cargo owner as a contract of carriage. It also can serve as a document of title for future trade negotiations, both of them serve as important pieces of the logistic puzzle.
However, there is more to dive in about these two documents. Throughout our research journey, we discovered that a bill of exchange and bill of lading, although mutually exclusive as a document, but each party is heavily reliant on each document as part of the logistic process, here is what we learn about these two documents.
Main Difference between Bill of Exchange and Bill of Lading
A Bill of Exchange
These two documents are entirely different, a bill of exchange is commonly used to facilitate the financing of a trade, while a bill of lading is the underlying document where the cargo owners contract a logistics provider to ship cargos internationally.
To elaborate further, a bill of exchange is sort after should the buyer wants two things from the seller: –
- The buyer wants to defer the payment of the shipment to 60,90 or 120 days. This is well over the standard business credit term of 30 days, which we are accustomed to.
- On top of the buyers wanting to defer payment, they also want to have the cargo shipped to them at a given time.
However, not all business transactions are built with the same trust level among the buyer and the seller. So, in return for the buyer’s request for the 2 requirements above, a seller would want: –
- A reputable institution that guarantees that the buyer will pay for the shipment at the maturity time.
- Receive payments regardless if the buyers defaulted on their obligation to pay
A bill of exchange fulfills all the criteria listed above. The seller (drawer) issues the bill of exchange, passes it on to an endorsee/payee (bank) and submits to the buyer (drawee) to countersign the bill.
How is this different from any conventional commercial invoice? Well, a commercial invoice can be issued, but there is no backed guarantee from a financial institution to pay if the buyer did not pay.
If the buyer declares bankruptcy, the seller is left exposed with an open invoice hanging.
A Bill of Lading
A Bill of Lading on the other hand, is issued by a freight forwarder/shipping carrier/3PL provider. The gist of it all is that the main logistics service provider contracted to transport the cargo, will be the issuer of that bill of lading.
Not only the fact that it represents a contract of carriage between the cargo owner and the logistics provider, it also serves as a document of title.
We have written at length about what a “document of title” generally means, but the short version is that a document of title gives the holder of the document possession rights of the good. This is an important distinction in transportation theory.
Because in practice, transportation of goods generally means handing over ownership of goods from one party to another. From the transport provider’s point of view, whoever holds the document of title, essentially means they are the rightful owner of the goods.
Of course, we have also written at length the different variations of a bill of lading as well as the implications of those variations as a document of title, whether it is negotiable title, or non-negotiable title. But for comparison purposes, a bill of lading is a document of title while a bill of exchange isn’t.
A Bill of Lading is a comprehensive document, it covers every single detail that pertains to the cargo in-transit: –
- Cargo weight and dimension
- Cargo description
- Cargo packing material
- Hazardous cargo detail
Not only that, the vessel information as well as the terms of the contract of affreightment is included into the bill of lading too.
A Bill of Exchange, on the other hand, is relatively simpler and hence a shorter format, the details that are included in a bill of exchange includes: –
- Drawer of the Bill
- Drawee of the Bill
- Endorsee/Payee of the Bill
- Date of the bill maturity
- Stamp Duty
Similarities between a Bill of Lading and Bill of Exchange
Bill of Exchange
While both documents have 2 significantly different function, there is one common denomination that these two documents share.
Both bill of lading and bill of exchange serves as an instrument that is negotiable, and transferrable. What this means is that basically, the original holder of the bill can be transferred to another owner.
Bearer bill of exchange can be negotiated at delivery. Which also means that the final holder, or the bearer, of the bill of exchange can walk up to the drawer of the bill and ask for the money that is due.
An order bill of exchange also works the same way where the bills can be negotiated by delivery and endorsement. Essentially, when the bill of exchange has matured, and the holder requests for the drawer to meet the obligation, it has to be endorsed by the previous holder of the bill of exchange.
Additional Reading: How Does a Bill of Exchange Work?
Bill of Lading
A bill of lading can also serve as a negotiable instrument, the key difference, however, is the underlying asset that is negotiated. With a bill of exchange, the underlying asset is the cash, while in a bill of lading, the underlying asset is the cargo transported.
Similar to a bill of exchange, there is an “Order Bill of Lading”. In this case, the final identity of the holder of the bill of lading can be anyone. As long as the bearer of the Order Bill of Lading has been endorsed by the previous bill holder, they are entitled to the possession of the underlying asset.
Additional Reading: What is a To Order Bill of Lading
The difference between a bill of exchange and a bill of lading is night and day.
We understand that one document can be misconstrued to be another document. But as long as we keep in mind a few key facts about each document that we mentioned above, we can utilize both documents to great effect to facilitate international trade.