A negotiable instrument is a document that serves as a legally binding promise to pay someone else a stated sum of money. There are three types of negotiable instruments: promissory notes, checks, and bills of exchange. A negotiable instrument is typically transferable, meaning the person who owns it can transfer the legal rights to receive the agreed-upon sum to another party.
Different Types of Negotiable Instruments
Promissory notes serve as an IOU; they’re written promises from one party to another to pay a specific sum of money, usually with interest, on a specific date. Checks are orders from a bank on behalf of an account holder to pay a designated sum of money on a particular date. Lastly, a bill of exchange is an order from one party to another to pay a certain sum of money to a third party on a certain date.
Single Payment or Installments?
Negotiable instruments usually allow for payment to be made in either a single payment or installments over an extended period of time. A negotiable instrument can also be used as collateral for a loan. This ensures that the lender can receive payment even if the borrower is unable to make payments.
Ensuring Payment
Negotiable instruments are usually secured by a bank, so if payment is ever at risk of being defaulted, the issuing bank can ensure payment of the note. The ability to transfer the legal rights to the note is also another security measure that can be taken to ensure payment, as the person who holds the rights can legally demand payment from the original issuer.
Conclusion
Negotiable instruments are a powerful and secure way to ensure payment for goods and services. They can be used to pay Federal taxes or to borrow from banks, and they can even be used as collateral for loans. By understanding the three types of negotiable instruments and what measures can be taken to secure them, businesses can ensure that they receive the money they’re owed.