Documents Used in Home Trade 6

Disadvantages of using a Bill of Exchange

i) It may be dishonoured on maturity

ii) Cash may not be readily available as banks may be reluctant to cash bills from debtors of doubtful financial backgrounds

iii) It is an expensive form of credit as the creditor may lose part of the face value of bill in form of discount

Circumstances under which a Bill of exchange is appropriate.

- When the creditor wants to be assured that the payment would be done

- Where the creditor wants money while the debtor is not able to raise it before the end of the credit period

- Where the creditor wants to use the debt to pay another debt. b) Promissory note; This is a document in which a debtor promised to pay a
creditor a specified sum of money at a specified time/date.

Features of a promissory note

i) There are two parties i.e. the drawer(debtor) and the payee(creditor)

ii) There is a promise to pay

iii) It is written by the debtor to the creditor

iv) It does not require acceptance since it is signed by the person committing to pay the money

v) The writer/maker is liable on the note as he/she is the debtor.

- After drawing and signing the promissory note, the debtor (borrower) sends it to the seller. (Lender)

- The seller/lender may keep it until maturity and then present it for payment or may discount it with the banks before maturity.

Similarities between a Bill of Exchange and a promissory note:

i) Both act as evidence of the acknowledgement of a debt

ii) Both may be discounted or endorsed before maturity

iii) Both are negotiable i.e. can be transferred from one person to another

iv) Both are legally binding

v) Both allow for adequate time within which to organize for the payment of the value of the bill or note.

Differences between a promissory note and a bill of exchange:

Promissory note Bill of Exchange

- Drawn and signed by the debtor

- Drawn and signed by the creditor

- It does not need to be accepted

- It must be accepted by the debtor for it to be valid

-The drawer and drawee are one person

-The drawer is the creditor and the drawee is the
debtor

c) The IOU

- IOU is an abbreviation of ‘I owe you’
- It is a written acknowledgement by a buyer of a debt arising from the purchase of goods and services on credit.

It is written and signed by the buyerand sent to the seller.If the seller accepts it, then the buyer can receive goods and services on
credit.

Though the IOU does not usually indicate the specific date of payment, the buyer acknowledges the debt and accepts responsibility to pay at a suitable future date

NOTE: The use of IOU is restricted to commercial transactions involving parties who have dealt with each other for a long time; hence they know each other well.

iv) Other means of payment

a) Credit cards

b) Mobile money transfer services e.g. M-pesa.

a) Credit cards(plastic money)

- These are plastic cards that enable a person to purchase goods or services on credit from any business willing to accept the card

- They are both a means of payment and a term of payment

b) Mobile money transfer services e.g. M-pesa
-This is a means of money transfer services provided by mobile phone service providers to their customers (subscribers)

- It can only be used to transfer money between people subscribed to the same mobile phone network e.g. from one safaricom subscriber to another safaricom subscriber, Airtel to Airtel e.t.c
-The sender must register for the money transfer service and is issued with a PIN (personal identification number)

- When money is sent, both the sender and the receiver will receive a message confirming the transfer.

- A person can send money anytime anywhere so long as he/she has value in his/her m-pesa, pesa pap account.

- Each mobile service provider has a range of value that can be transferred using this method.

- A small transaction fee is charges for the transfer i.e. for sending and withdrawing

Benefits of mobile money transfer services

i. Confidentiality

The secret PIN protects the value in the customer’s account

ii. Ease of use

The service is easy to use as the agents assists to carry out transaction

iii. Speed

Money transfer is an instant service conveyed to the receiver via the short message service(SMS)

iv. Convenience

The service is convenient to both the sender and the receiver,as they only need to go to the nearest agent(money can be sent/deposited or received anywhere)

v. Accessibility

The agents e.g. m-pesa agents are located in most parts of towns and also in rural areas. Money can hence be sent and received anywhere and anytime.

vi. Affordability

The service charges are very low for registered users and very affordable for non registered users

vii. Security

Relatively secure when the sender uses the correct phone number of the receiver.

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