The legal definition of a bill of exchange is an unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person (payee), or to bearer. The words in brackets do not appear in the Act, but have been inserted for clarity.

Bills of exchange are widely used in international trade, partly since they are convenient vehicles for collecting payment from traders abroad. Finance may be arranged in a number of ways using bills of exchange, both for the buyer (drawee) and for the seller (drawer). Bills of exchange, which have been dishonored, may be used in their own right as the basis for legal action. After payment, the discharged bill of exchange is retained by the drawee as evidence of payment, in other words it becomes a receipt for the money. It is the practice in some European countries for banks to avail bills of exchange by adding the bank's name to the bill; this raises the status of the document as the availing bank has guaranteed payment at maturity.