What it means
Payment instruments such as cheques and bills of exchange involve three roles rather than two. The drawer creates the order to pay, the drawee is ordered to pay, and the payee is the beneficiary who ends up with the funds.
On a cheque the arrangement is familiar even if the vocabulary is not. A supplier writes a cheque to a landlord, so the supplier is the drawer, the landlord is the payee, and the supplier's bank is the drawee that must release the money.
In a bill of exchange used in trade, the drawee is usually the buyer rather than a bank. The seller draws the bill on the buyer, demanding payment at sight or on a set future date, which is how credit terms get documented in international trade.
A drawee is not obliged to pay simply because a bill has been drawn on them. Only when the drawee signs the instrument, an act called acceptance, do they become the acceptor and take on a direct liability to pay at maturity.
If the drawee refuses, the instrument is said to be dishonoured, and the holder can pursue the drawer instead. This is why sellers frequently prefer a bill accepted by a bank, since a bank's obligation is far more dependable than an unknown buyer's.
Understanding the role matters for anyone reading trade documents or chasing a payment. Knowing who the drawee is tells you exactly whose bank account and whose creditworthiness the payment actually depends on.
In practice
Real-world examples.
Example
A construction firm pays a subcontractor by cheque for $18,000. The construction firm is the drawer, the subcontractor is the payee, and the firm's bank is the drawee that debits the account when the cheque is presented. If the account lacks the funds, the drawee bank returns the cheque unpaid and the subcontractor must chase the construction firm directly.
Example
An exporter ships machinery and draws a 90-day bill of exchange on the overseas buyer for $180,000. The buyer is the drawee and becomes the acceptor by signing the bill, which commits it to pay on the maturity date. The exporter can then discount the accepted bill with its own bank to receive cash before the 90 days are up.
Example
Under a letter of credit, an importer's bank is named as the drawee rather than the importer itself. The exporter accepts the arrangement because the bank's promise to pay is far stronger than the importer's, and it ships the goods with confidence. The importer, in turn, reimburses its bank under a separate facility agreement once the documents are presented.
Case study
Seen in the real world.
Marlspur Textiles is a fictional exporter created for this illustrative example. It agreed to supply $180,000 of fabric to an overseas wholesaler on 90-day credit terms and documented the arrangement with a bill of exchange.
Marlspur drew the bill on the wholesaler, making the wholesaler the drawee. The wholesaler signed to accept it, becoming the acceptor and taking on a direct obligation to pay at maturity, which allowed Marlspur to release the shipment against a documented promise rather than an informal one.
On a second order the wholesaler asked for larger volumes, and the illustrative finance manager took a different route. She insisted the buyer's bank be named as the drawee under a letter of credit, so that the payment depended on a bank's balance sheet rather than a single customer's trading fortunes. The fictional outcome was that Marlspur could also raise cash earlier: because a bank rather than a trading company stood behind the accepted bill, its own lender was willing to discount the instrument at a lower rate, turning a 90-day promise into working capital within days of shipment.
Watch out
Common mistakes.
- Assuming the drawee is always a bank, when in a commercial bill of exchange the drawee is usually the buyer who owes the money.
- Mixing up drawer and drawee, which reverses who is instructing payment and who is being instructed to pay.
- Treating a bill as good as cash the moment it is drawn, before the drawee has accepted it and taken on any liability at all.
Questions
People also ask.
Who is the drawee on a cheque?
The bank on which the cheque is drawn, since it holds the drawer's account and is the party instructed to release the funds.
What happens if the drawee refuses to pay?
The instrument is dishonoured, and the holder can claim against the drawer and any endorsers rather than losing the debt entirely.
What is the difference between a drawee and an acceptor?
The drawee is simply the party the bill is addressed to, and that same party becomes the acceptor only once it signs the bill and commits to pay.
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