written by | May 13, 2022

What Are The Negotiable Instruments – Meaning, Types & Uses?

The term negotiable instrument simply refers to any signed document that promises to pay a certain amount to the recipient. It's an IOU note that puts an assurance of the paper payment. 

The document can be transferred to another person and must be signed to be valid. It could specify when the money will be accessible or used upon demand. The recipient must be listed in the on-paper document most of the time. After the transfer of the instrument, the beneficiary assumes legal ownership of the funds.

Let's understand negotiable instruments meaning, terms, features and vitals.

Did You Know?

Under the Negotiable instrument act, only three types of instruments are famous negotiable instruments, and these are bills of exchange, promissory notes and cheques. The bill also states the penalties for dishonouring cheques and other violations linked to negotiable instruments.

What’s the Function of Negotiable Instruments?

Negotiable Instruments are the papers to facilitate payments. The ownership of these documents is transferable from one person to another before the payment is made. 

It is a commonplace for transactions that involve large amounts of money in the current business environment. Also, it can be quite a hassle for both parties to receive and make payments in cash.

It is now normal for professionals to use specific documents that allow for the transfer and payment of huge money. A few such documents can be known as negotiable instruments.

According to Section 13 of the Negotiable Instruments Act of 1881, negotiable instruments are "a promissory note, bill of exchange or cheque, payable either to order or to the bearer".

But, many other instruments are also regarded as instruments that can be traded in the context of specific and customary usage, such as Treasury bills, shares warrants, hundis, etc., since they can have the attribute of negotiability. Also, if you are going to lend anybody an investment for a business, be sure to know whether the person will be capable of returning your money or not.

Also Read: All You Need To Know About Post-dated Cheques

Features of Negotiable Instruments

  • Written documents must be used: The instruments for negotiation have to be written. That includes notes written in-hand, printed, typed, engraved, etc.
  • Easily Transferable: The ability to transfer a negotiable instrument can be effortlessly and readily transferable. There aren't any formalities or lots of paperwork in an exchange.
  • Payees must also be specific: The person to whom the payment will be made has to be specific. There can also be multiple payees for a negotiable instrument. Also, the term "person" includes artificial persons too, such as trade unions, corporate body chairman, secretaries, etc.
  • The time of payment must be certain: When the order requires payment at a convenient time, the arrangement is not considered a bargain-able instrument. In this case, the period needs confirmation even without any specific date. For instance, it's acceptable to make a payment tied to the death of an individual since death is a specific moment.

Types of Negotiable Instruments

Promissory notes and Personal cheques are the two most popular types of negotiable instruments examples. However, there are many kinds of paperwork that fit within this category. Here are a few of the most popular instruments:

Bearer Bonds

They are unregistered bonds that Corporate or governments issue. As the name implies, the bondholder will receive a coupon and principal instalment. The issuer does not keep the file of the initial bondholder. The person who has physical possession of the bearer of the bond is an owner in law. Thus, there is a significant possibility of loss, theft, or destruction of Bearer bonds.


Cheques are a note containing the amount one person pays to another. It includes the bearer's name and the account number where the funds will be taken. Additionally, it consists of the person who is paying. Even if the cheque is unclaimed, no other person can use it to commit fraud. In essence, cheques are the most secure method for making payments or moving money from one person to another.

Deducting the funds from one account and reimbursing the same to the other is more time-consuming. However, many people are still thinking of issuing cheques for security reasons. Companies and individuals use various cheques, such as traveller's cheques, cashier's cheques, certified cheques, personal cheques, etc.

Traveller's Cheques

A different, less popular type of negotiable instrument is the traveller's cheque. They require two signatures to be valid, and the document's signer is the person paying at the date of issue. 

An additional signature is necessary when it is time to issue the payment. The documents are useful in foreign countries where banks issue them in prepaid funds. Traveller's cheques are getting scarcer, and many foreign retailers don't accept them. 

Bills of Exchange 

In transactions involving both services and goods, they are legally binding documents. These bills direct one person to pay a certain amount to another person. The person who pays the bill accepts the exchange bill, an official contract for payment. If issued through a bank, the bill of exchange is typically referred to as a draft from a bank. If an individual or business issues the bill, we call it a trade draft.

Money Order

Money orders provide a speedy and reliable payment option, and they are issued by a financial institution or any other organisation. You can purchase an order for money in cash and determine its value before sending it to the recipient. 

The cash exchange takes place in the end. The primary distinction between money orders and cheques is that money orders typically limit the amount of money issued. They also have smaller personal details than a check because no personal information about your bank account is mandatory.

Promissory Notes

If a promissory note is issued, it reveals the amount due and the interest rate and the payment due date. Like other negotiable instruments, they are written documents that show a promise to pay made between a payer and the recipient. 

The document is filled with all relevant details, such as the interest rate, the date of issue, the principal amount and the payee's signature. The advantage of promissory notes is that it permits companies to access funding outside official financial institutions.

Importance of Negotiable Instruments

If we talk about negotiable instruments’ meaning, we have paramount importance in the business world. They have always increased as a result of the development of international trade.

  • Transferring information between two people occurs effortlessly and without many formalities, making it easier for its extensive application in the world of business.
  • The right to property that guarantees full ownership is there in this promissory rights.
  • It's possible to make transfers by endorsement or delivery, which is the norm in commercial transactions.
  • The payments are instant, thereby saving you a lot of time.

Also Read: Everything about Banker’s Cheques & How to Use Them

Advantages of Negotiable Instruments

  • The debtor doesn't need to wait until maturity to receive the cash. He can instantly opt for bill discounting.
  • Accommodation bills allow business owners to get money at a lower rate of interest to pay for any financial gaps which may result from working.
  • One of the major benefits of bills of exchange lies in the fact that the amount of consideration between the debtor and creditor comes under the assumption. Therefore, we assume that the buyer is in debt with the seller. However, the seller doesn't need to prove it. Because the creditor acknowledges the debt, the judge will conclude that the obligation is legitimately present.


Negotiable instruments are essential to the economy as they permit you to conduct business and be sure you'll get money in exchange for goods/services without transferring any cash. Without laws that protect both the payer and the recipient of negotiable instruments, the economy will not function as it operates. Also, Khatabook is another perfect way of saving time that you usually waste while calculating all your business transactions.

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Q: What Are the Benefits of a Promissory Note?


Following are some of the main benefits of using a promissory note

  • This sort of instrument isn’t too long compared to other various methods.
  • Very Beneficial in case of a loan with simple payment terms. 
  • Very straightforward and easy to understand.

Q: What Is the Enactment Date of the Negotiable Instruments Act?


It is 1881-12-09.

Q: What Does the Negotiable Instrument Act 1881 Relate To?


Negotiable Instruments Act, 1881 relates to all negotiable instruments such as bills of exchange, promissory notes and cheques.

Q: Are Bonds Negotiable Instruments?


Yes, bonds issued by corporate and government agencies are negotiable instruments we can exchange. They are currently only considered the sole owner, and the issuer does not have anything in common with the initial bond owner.

Q: What Are the Negotiable Instruments Used in the Banking Industry?


A promissory note, draft, money orders and cheques are among the most common instruments for negotiation in the banking industry.

Q: What are the types of negotiable instruments?


There are many sorts of negotiable instruments. Personal cheques, promissory notes, traveller's cheques, money orders and certificates of deposit are the most common ones. These act as payment/repayment assurance that the assignee expects. As per the note's nature, these instruments may not have the recipients' names.

Q: What is a negotiable instrument?


The simplest negotiable instruments definition is - A negotiable instrument is a document signed to promise a sum of payment to a certain person or the assignee.

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