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What is a Bill of Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 December 2016
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    Conjecture Corporation
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A bill of credit is a type of financial instrument that may be issued by a government or as part of a merchant transaction, and has the express purpose of being distributed as money. The term is most often associated with the issuance of bills of credit in the USA, in accordance with the application of the phrase in the United States Constitution. Essentially, the provisions within the Constitution specify that no state shall emit a bill of credit, although promissory notes are considered acceptable.

In countries that do allow state and national governments to make use of the bill of credit, the documents are typically not covered or underwritten by some type of security. Instead, the documents are issued by the government based on the established faith and credit of that government. The document is used as currency to pay bills or to conduct any number of financial transactions.

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With general business transactions, a bill of credit has a similar meaning and use. Typically, the term describes a type of letter that is prepared and forwarded by an agent to a merchant. Within the text of the letter, the agent requests that the merchant provide credit to the party designated in the letter, with that credit to not extend past a certain amount that is also identified in the text. The designated party, known as the bearer, is then able to use that line of credit to secure various types of goods or services from the merchant, or even receive cash up to the amount specified in the bill of credit.

In both scenarios, a bill of credit can be viewed as a document that is used in the place of currency in a transaction taking place today, with the expectation being that the bill will be redeemed with payment in cash at some point in the future. One benefit to this approach is that anyone who accepts the bill is accepting it for payment as if the document were cash. This means that there are usually no finance charges applied if the balance is paid off within a certain period of time. Assuming that the bearer can comply with those terms, the result can be saving a great deal of money while still enjoying the benefits of delaying full payment to a more advantageous time. The merchant may also consider this an equitable arrangement, in that the transaction generates income that will eventually be realized as cash at some time in the future.

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