What Is a Negotiable Instrument?

by Sam Grover ; Updated July 27, 2017
Checks are an example of negotiable instruments.

A negotiable instrument is a method of payment that does not actually pay someone. Rather, it negotiates to pay the person later. It is a promise of money in the future. By contrast, cash has a set, non-negotiable value. Negotiable instruments are often used by businesses and banks to pay one another.

Check

The most common example of a negotiable instrument is a check. Since a check is simply a piece of paper, it doesn't have any actual value. However, once you write an amount on a check and sign it, you are agreeing to pay the recipient that amount in the futureā€”in this case, whenever the recipient cashes it.

Promissory Note

Another example of a negotiable instrument is a promissory note. This is a contract in which one person agrees to pay another person in the future. Rather than involve a third party, like checks do, a promissory note promises direct payment at a certain date.

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Draft

According to Allbusiness.com, a draft is a negotiable instrument generally used in international trade, and is an order written by an exporter requesting an importer to pay the exporter a specific amount at a certain time.

Features

According to ReferenceForBusiness.com's Encyclopedia of Business, negotiable instruments need five features to be valid and legal: They must be in writing, they must specify a certain amount of money, they must pay at a certain time, they need to be payable to the bearer, and they need to be signed.

About the Author

Sam Grover began writing in 2005, also having worked as a behavior therapist and teacher. His work has appeared in New Zealand publications "Critic" and "Logic," where he covered political and educational issues. Grover graduated from the University of Otago with a Bachelor of Arts in history.

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