Endorsement and Discounting of a Bill

A holder of a bill does not have to wait until the due date to get value from it — two common ways of using a bill before maturity are endorsement and discounting.

Endorsement is when the holder signs the back of the bill and transfers it to a third party, most often to settle a debt the holder owes to that third party. No cash changes hands at the point of endorsement; the bill itself becomes the means of payment. The drawee's liability is unaffected by the endorsement — the drawee simply pays whoever presents the bill on the due date.

Discounting is when the holder sells the bill to a bank before its due date in exchange for immediate cash, in return for which the bank deducts a charge, called the discount, calculated on the unexpired period of the bill. Discounting is, in effect, borrowing against the strength of the drawee's acceptance. …