Under the check/bill of exchange procedure, the customer and not the vendor uses the bill of exchange for refinancing. This is shown in the figure below:
The chain of events is as follows:
- The customer pays for goods with a check. At the same time, he draws a bill of exchange on which he is named as the drawee and the vendor as the drawer. He sends the check and the bill of exchange to the vendor.
- The vendor signs the bill of exchange as the drawer and returns it to the customer.
- The customer passes on the bill of exchange to his bank to be discounted. Although the bill of exchange is drawn on him, he uses it himself for refinancing: he is credited with an amount that he himself owes to his vendor. The bank credits him with the bill of exchange amount minus the charges and discount interest.