Negotiable Instrument

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 12, 2023

Ask a Financial Professional Any Question

What Is a Negotiable Instrument?

A negotiable instrument is a written document that guarantees the payment of a specific sum of money to the bearer or the assigned recipient.

It serves as a legal medium for transferring monetary obligations or rights from one party to another. Negotiable instruments are widely used in commercial and financial transactions to facilitate trade and provide security in payment.

The purpose of a negotiable instrument is to provide a means of payment and transfer of financial obligations in a secure and efficient manner.

It allows parties to engage in business transactions with confidence, knowing that they can rely on the negotiability and enforceability of the instrument.

Negotiable instruments offer convenience, flexibility, and legal protection to parties involved in financial transactions.

Types of Negotiable Instruments

Promissory Notes

A promissory note is a negotiable instrument that contains a promise to pay a specified sum of money at a designated time or upon demand. It involves two parties: the maker, who promises to pay, and the payee, who will receive the payment.

Promissory notes are commonly used in lending agreements, credit transactions, and other situations where one party owes a debt to another.

Bills of Exchange

A bill of exchange is a written order issued by one party, known as the drawer, to another party, known as the drawee, instructing the drawee to pay a specified sum of money to a third party, known as the payee.

Bills of exchange are often used in international trade or as a form of short-term credit. They enable businesses to create a financial instrument that can be used for payment or to obtain financing.


Cheques are negotiable instruments issued by individuals or businesses to pay a specific sum of money to a recipient or payee.

They are drawn on a bank or financial institution and provide a secure and convenient method of payment. Cheques are commonly used for various purposes, such as paying bills, making purchases, or transferring funds between accounts.

Features of Negotiable Instruments


One of the key features of negotiable instruments is their transferability. They can be freely transferred from one party to another by delivery or endorsement, enabling the assignment of rights and obligations.

The ability to transfer ownership of the instrument facilitates the flow of funds in commercial transactions.

Unconditional Payment

Negotiable instruments provide for the unconditional payment of a specific sum of money. The payment obligation is not subject to any conditions or contingencies, ensuring that the instrument holder can rely on the promised payment without any qualifications or limitations.

Specific Amount

Negotiable instruments specify a specific sum of money that is payable to the bearer or the assigned recipient. This clarity regarding the amount ensures certainty and predictability in financial transactions, allowing parties to determine the exact value of the instrument.

Payable on Demand or at a Fixed Time

Negotiable instruments can be payable on demand, meaning they are immediately payable upon presentation, or at a fixed time in the future. The payment terms are clearly stated in the instrument, providing a clear timeline for the fulfillment of the payment obligation.

Importance of Negotiable Instruments

Role in Financial Transactions

Negotiable instruments play a crucial role in facilitating financial transactions, particularly in the context of commerce and trade.

They provide a secure and standardized method of transferring financial obligations, ensuring that parties involved can confidently engage in business transactions.

Convenience and Safety

Negotiable instruments offer convenience and safety in financial transactions. They provide a paper trail that serves as proof of payment and can be used for record-keeping and accounting purposes.

The use of negotiable instruments reduces the need for carrying large sums of cash and minimizes the risk of loss or theft.

Contribution to Economic Development

Negotiable instruments contribute to economic development by promoting business activities, trade, and investment.

They provide a reliable mechanism for conducting financial transactions, which encourages businesses to engage in commercial activities and fosters economic growth.

Negotiable instruments enable businesses to obtain credit, expand their operations, and manage their cash flow effectively.

Moreover, negotiable instruments facilitate the circulation of money within the economy. By providing a means of payment and transfer, they promote liquidity and enable the efficient allocation of financial resources.

This liquidity enhances the velocity of money, leading to increased economic activity and productivity.

Negotiable instruments also play a vital role in international trade. Bills of exchange and other negotiable instruments are widely used in cross-border transactions, providing a mechanism for businesses to buy and sell goods and services across different countries.

The ability to issue and accept negotiable instruments facilitates global commerce and contributes to international economic integration.

Benefits of Negotiable Instruments

Liquidity and Credit Creation

Negotiable instruments enhance liquidity by providing a mechanism for creating credit. They allow businesses and individuals to access funds by leveraging the value of the instrument.

For example, a business can use a negotiable instrument, such as a promissory note, to obtain a loan from a financial institution, thereby increasing its available funds for investment or working capital.

Safety and Security

Negotiable instruments offer a high level of safety and security in financial transactions. They provide legal protections and enforceability, ensuring that parties involved in the transaction are legally bound to fulfill their obligations.

This reduces the risk of payment default and enhances trust between transacting parties.

Flexibility and Convenience

Negotiable instruments offer flexibility and convenience in financial transactions. They can be customized to meet the specific needs of the parties involved, such as determining the payment terms, maturity dates, or other conditions.

Additionally, negotiable instruments can be easily transferred, enabling parties to adapt and modify their financial arrangements as circumstances change.

Drawbacks of Negotiable Instruments

Risk of Loss or Theft

One drawback of negotiable instruments is the risk of loss or theft. Since negotiable instruments represent a monetary value, if they are lost or stolen, there is a potential for financial loss.

Therefore, it is important to handle negotiable instruments with care and take necessary precautions to safeguard them.

Risk of Dishonoring

Negotiable instruments are subject to the risk of dishonoring, meaning that the party obligated to make the payment fails to do so.

This can occur due to various reasons, such as insufficient funds, lack of creditworthiness, or intentional refusal to honor the obligation. In such cases, the holder of the negotiable instrument may face difficulties in obtaining the payment owed to them.

Dependence on Signature Verification

Negotiable instruments rely on the verification of signatures to ensure their validity and enforceability. However, signature verification can be subject to fraud or forgery, posing a risk to the parties involved in the transaction.

To mitigate this risk, it is important to implement robust security measures and ensure proper authentication of signatures on negotiable instruments.

Benefits and Drawbacks of Negotiable Instruments

Bottom Line

A negotiable instrument is a written document that guarantees the payment of a specific sum of money to the bearer or the assigned recipient. It serves as a means of payment and transfer in financial transactions.

Negotiable instruments have characteristics such as transferability, unconditional payment, specific amount, and payment terms that contribute to their effectiveness in financial transactions.

Negotiable instruments offer benefits such as liquidity, safety, security, flexibility, and convenience. However, they also come with drawbacks, including the risk of loss or theft, the risk of dishonoring, and the reliance on signature verification.

Negotiable instruments are an integral part of the financial landscape, enabling the seamless flow of funds, facilitating credit creation, and contributing to economic growth.

They provide a framework for trust and reliability in financial transactions, offering benefits such as liquidity, safety, and flexibility.

Negotiable Instrument FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

Find Bank Branches and ATMs Near You

Find Advisor Near You