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What Is Bills Payable?

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  • Written By: Keith Koons
  • Edited By: Lauren Fritsky
  • Last Modified Date: 01 December 2016
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Bills payable is primarily a financial term that refers to when banks borrow money from the government or other banks. This process involves the borrowing institution signing a promissory note that states when and how the funds will be repaid, and these types of transactions are very common among all types of lenders. The borrowed money is often acquired at 0-percent interest or slightly higher. In other industries, the term "bills payable" is a term that is used in place of accounts payable, which describes how businesses handle payments to vendors and suppliers.

The reason for a bills payable system is because financial institutions need plenty of operating capital to meet the needs of their everyday clients. Instead of leaving millions of US Dollars (USD) in funds sitting around in a checking account or a vault to meet this demand, banks freely lend money back and forth to each other throughout the business day. This process allows financial institutions to leave the vast majority of their funds in investments around the world while still having access to a large amount of capital.

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A bills payable agreement is not actually thought of as a loan. This type of agreement often has very limited repayment terms to reduce the burden on the lending bank. In many cases, the borrowed funds are repaid during the same business day or within 24 hours of the transaction. Other situations may allow the borrowing bank to carry the loan for a number of days or even weeks, although this type of agreement is much less common.

Government banks are responsible for a large part of these loans because of the Federal Deposit Insurance Corporation (FDIC). This government entity places a guarantee on all consumer deposits up to $250,000 (USD) per financial account. Whenever a bank is asked to cover a large transaction that it does not have in liquid form, a bills payable agreement allows it to access these funds immediately in order to meet the needs of the customers. Without this coverage, it may take lending corporations several days to sell enough stocks and bonds to cover even basic transactions.

Another definition of bills payable refers to the way businesses handle their money when it comes to receiving payments and paying vendors. While many would think of this as a company's accounting or collections department, these types of employees mainly handle clerical tasks that have to do with tracking money. For example, an automotive repair shop may receive parts from a dozen or more vendors on credit, and each vendor may have different repayment terms. The bills receivable clerk keeps up with each of these deadlines to ensure the company has a positive cash flow from day to day.

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