Several payments are made in the company in one day, and cash cannot be used constantly. In order to reduce the danger of bringing cash for payment by products and services companies, negotiable instruments are more appropriate. A negotiable instrument is a document that guarantees the payment, on-demand or at certain times, of a particular sum of money. Under the Act on Negotiable Instruments, 1881 only three forms of negotiables, i.e. a promissory note, an exchange bill, and a check, are present in India. In this post, we will discuss the difference between promissory notes and cheques, both of which are negotiable tools. While providing similar goals, there are a lot of differences between promissory note and cheque.
- Differences based on definition
We all know that checks are fairly commonplace and are safe ways of transferring money. Our employers pay us with cheques which we deposit into our current account, and the money is added to our account. We must pay suppliers in companies when their invoice is due. You can submit the cheque at a bank that credits the amount stated by us to your account and debits our account with the same amount. They are documents given to a bank entitling the individual whose name they bear to collect the money specified.
In other words, Cheque is a negotiable document that enables a financial institution to pay a particular amount of money on a particular claim account held with that institution on behalf of the depositor. It is regarded as the most convenient method of payment which eliminates cash requirements in any company.
For instance, consider the following: If a businessman writes a cheque for Rs 50,000 to a supplier and the supplier deposits the money in his bank account. The bank will first authenticate the check before transferring funds from the businessman’s account to the supplier’s account. That is, the supplier’s account will be credited with Rs 50,000, while the businessman’s account would be debited with the same amount.
A promissory note is a financial tool that involves a written undertaking by one side (an issuer or maker’s note), either on request or at a set future date, to pay a certain sum of cash to a different party (a payee’s note).
A promissory note usually includes all of the details of the debt, including the principal amount, interest rate, maturity date, date and location of issuance, and the signature of the issuer.
Promissory notes are debt instruments that allow enterprises and people to obtain funding from sources other than banks, despite the fact that financial institutions may issue them (see below). This source could be an individual or a business prepared to carry the note (and supply the funding) on the agreed conditions. Promissory notes, in effect, give everyone the ability to lend money. For example, you may be asked to sign a promissory note in order to obtain a small personal loan, though this is not always the case.
Let’s look at an example of a promissory note. If you borrow Rs.5000 from your business partner Rahul, you can reassure him that his money would be safe by issuing a document stating that you will pay the money to Rahul or the holder of the document on the specified date. This document, once signed and stamped, becomes a promissory note since it includes a promise from you to Rohit that you will repay the money within a certain time frame.
- Differences based on Parties
In a cheque, there are three persons engaged. Drawer, drawee, and payee are their identities. The account holder is the drawer, the bank is the drawee, and the payee is the recipient of the payment. The following are the parties involved in a cheque:
1. The Drawer
The party who writes the cheque on a specific banker is known as the drawer. He’s the one who signed the cheque. He is the account holder, and he is the one who writes the cheque to withdraw money from his bank account. He is the one who writes the check instructing the bank to pay a specific amount of money to a specific person or the bearer. As a result, the individual who signs the check is referred to as the drawer.
Drawee is the party upon whom the cheque is drawn. Drawee is the bank. It is the party to whom the drawer gives an order to pay the amount to the person named on the cheque or his order to the bearer. When the bank follows the order and pays the amount of the cheque then the cheque is said to be honored. In case of refusal of the order, the cheque is said to be dishonored.
The payee is the party who presents the cheque for payment. He is the person who receives money from the bank. He is the party in favor of whom the cheque is issued. The payee is the person whose name is mentioned on the cheque. If the cheque is made payable to self, the drawer himself becomes the payee.
A promissory note involves two key parties: the drawer or maker and the drawee or payee. However, depending on how it is utilized, the following parties may also be engaged. We’ll see when they arrive and what part they play in this paragraph.
A drawer is an individual who commits to pay the drawee a specific sum of money when the promissory note matures. He/she is also referred to as a maker.
Drawee: She or he is the person for whom the note is written. Unless the promissory note is formally transferred in favor of the payee, the drawee is usually also the payee. For example, if Rai claims to pay Radha Rs.5000, he has termed a drawer (Radha is the drawee). Rai becomes the payee if the same promissory note is transferred in his favor.
- Differences based on Requirement
If you’re writing a cheque to pay someone or a company, you must thoroughly fill out the cheque before the bank will accept it. You must fill out the “Pay To The Order Of” area, spell out the check’s dollar amount, type the actual figures for the amount, and sign the check. If this information is absent from the cheque, the banking institution will not cash it.
At the bottom of every cheque, the bank’s routing number and the whole account number are displayed, whether it’s for a personal or commercial account. Furthermore, the cheque number is usually printed in two places on the check. Your cheque number can be found in the upper right corner of the cheque, after your banking account number, and at the bottom of the check.
As a result, a promissory note must meet all of the regular contract conditions, such as agreement, consideration, and capacity. If the note’s authenticity is challenged, the same defenses, such as forgery or deception, may apply.
A pomissory note includes parties’ names, the amount of money borrowed, the amount that needs to be reimbursed, how and when transactions are paid (monthly or in one big sum), as well as the dates, if applicable, the interest rate, whether fixed, variable, or increasing over time, what happens if you miss a payment or don’t repay the loan? In addition, who is in charge of the loan repayment, whether the loan is secured by any collateral or property if the note can be transferred or assigned, what rights do you have, the issue date and location, the signature of the issuer.
It’s important to keep in mind that some terms may overlap or be completely incompatible. There may be no repayment plan on a note that is paid in full at once. If the note includes the whole amount to be repaid, the interest rate may not be specified expressly.
- Differences based on The necessity of instrument bank account
The drawer needs a bank account to write up a cheque. The bank issues a cheque to the bank owner that allows the account owner to withdraw funds from his account. The drawer doesn’t require a bank account at any bank to make a promissory note.
- Differences based on Payment Period
A promissory note is a promising reimbursement of the debt if it is a one-time payment, either at installments or in one installment later.
- Differences based on Acceptability
In the event of a Promissory Note, acceptance is not required but acceptance is necessary in the case of a cheque before payment is made.
- Differences based on whether conditional or unconditional
The drawer can set a payment condition by writing a cheque. The drawer may make two parallel paylines above the left side of the cheque or write in two parallel lines, showing that payments are not transferable in cash to the drawee bank account. There is an unconditional guarantee made by the payee in a promissory note
From this article, we were able to deduce that a cheque is a document that you can give to your bank that instructs it to pay the stated amount in figures and words to the individual whose name appears on the cheque. Negotiable instruments are sometimes known as cheques. In addition, promissory notes are a vital financial instrument. It establishes a legal record of the amount you loaned, as well as all pertinent information. Furthermore, it is a very useful source of capital for businesses.
You need to be very careful before you get to use either the check or the promissory note. You must recall the differences between a promissory note and checks at that time. You can use one out of the two at the right time if you are very efficient about the feature and the working.