Understanding Bills of Exchange & Financial Lending Factors
Understanding Bills of Exchange
A bill of exchange is a financial instrument created for the purpose of transferring funds and serving as a payment mechanism. Its structure includes an endorsement clause, allowing the holder to transfer ownership of the document to another party, who in turn may transmit it to others, and so on.
Key Parties in a Bill of Exchange
- Drawer: The party who issues the bill.
- Drawee: The party to whom the bill is addressed and who is obligated to pay.
- Place of Drawing: The locality where the bill is issued.
- Date of Issue: The specific day, month, and year on which the bill is created.
- Endorser: The party who transfers the bill.
- Endorsee: The party who receives the bill.
The final endorsee is known as the last holder; previous endorsees are simply holders, unless the person or entity that issued the bill (the drawer) is also the payee. If the bill explicitly states “Not to Order,” it cannot be fully endorsed.
Maturity of Bills of Exchange
The maturity of a bill of exchange is the date on which it becomes due and must be honored. In all cases, except for sight bills, the due date will be on the specified date or within two working days.
Types of Bill Maturity
- At a Fixed Date: The bill is payable on a specific, predetermined date.
- At a Certain Period After Date: The bill is payable on the day resulting from adding the specified period to the date of issue.
- At Sight: The bill is payable upon presentation. Presentation must occur within one year following the date of issue. If the bill does not state a maturity date, it is understood to be payable at sight.
- At a Certain Period After Sight: The maturity is determined by adding the prescribed period to the date of acceptance, or, in default of acceptance, to the date of notarial protest or an equivalent statement.
Bill of Exchange Guarantee (Aval)
An aval (bill of exchange guarantee) is a document written on the bill itself, in which a third party undertakes to guarantee payment to all persons involved in the document. The guarantee must always include the signature of the guarantor and indicate the person who is supported. If not specified, it is understood to guarantee the acceptor, or, in the absence of an acceptor, the drawer.
External Information Sources for Credit Assessment
The primary external information sources for entities granting credit include:
- Property Registry
- Commercial Registry
- Bank of Spain’s Risk Information Centre (CIRBE)
- ASNEF-Equifax and RAI (Registry of Unpaid Acceptances)
Factors Affecting Asset Transactions & Lending
Key factors influencing the provision of asset transactions (lending) are Risk, Term, and Compensation.
Security of the Operation (Risk)
Any bank or savings bank is willing to lend if there is assurance that the funds will be returned, along with interest, at the agreed time. This relates directly to the perceived risk of the operation.
Term of the Operation
Advantages of short-term financing include:
- Ability to serve more customers.
- Increased profitability through commissions.
- Distribution of default risk among a larger number of borrowers, increasing market penetration.
- Higher interest yield.
When the financing term exceeds ten years, most institutions typically require special guarantees from their customers.
Customer Compensation
This compensation usually involves the transfer of operations that enable the credit institution to earn additional income beyond the interest and fees from the credit or loan. A good level of compensation significantly increases the likelihood of credit approval.