What What are credit titles? How do they work and what are they for? See examples.

Here’s an example…

Imagine a store selling goods on credit to a customer. The store can issue a duplicate invoice, which serves as a guarantee that payment will be made on the agreed date. A check, on the other hand, is used for immediate payments, offering a promise that the bank will pay the specified amount to the bearer. Therefore, credit instruments are essential tools for those seeking security and predictability in their financial transactions.

What are the types of Credit Titles?

There are several types of credit instruments, each with its own characteristics and purposes. Here are the most common:

Promissory note

It's a credit instrument that contains a promise of payment made by the issuer. The issuer agrees to pay the creditor a specified amount on a future date. It's widely used in commercial negotiations and financing.

Check

It works like a cash payment order. When issuing a check, the checking account holder authorizes the bank to pay the specified amount to the check's bearer. It is one of the most common payment methods and can be used for both personal and commercial transactions.

Duplicate

It's a credit instrument used in the sale of goods or the provision of services on credit. The duplicate acts as a formal collection and can be protested in the event of default. It's widely used by companies to formalize sales and ensure payment.

Bill of exchange

It is a security containing a payment order, where the issuer (drawer) orders a third party (drawee) to pay a specified amount to the beneficiary (borrower) on a future date. It is widely used in financing operations and international transactions.

Other Titles

• • Warrants: These are titles that represent the ownership of goods stored in general warehouses, allowing the owner to use the title as collateral to obtain credit.
  • Credit Notes: These are securities that represent a debt guaranteed by movable or immovable property, such as rural, commercial and industrial credit notes.
  • Debentures: These are securities issued by companies that represent a debt to be paid to their holders, usually with a defined term and interest rate. They are used as a means of raising funds in the capital markets.

What are the principles of credit titles?

Credit instruments follow certain fundamental principles that ensure their effectiveness and security in financial transactions. These principles are essential for the proper functioning of the instruments and for the trust of the parties involved. The main ones are:

• Literality: The content and obligations of a credit instrument are determined exclusively by what is written on it. This means that, to be valid, everything promised or ordered must be clearly described in the instrument itself.
• Autonomy: Each credit instrument is considered an independent document. The obligations contained therein are not dependent on other negotiations or contracts between the parties. In other words, if a person endorses a check or promissory note, they are not liable for any disputes or problems arising from previous contracts related to the instrument.
• Cartularity: Refers to the need to possess the physical document (or electronic title, when permitted) to exercise the right to credit. To collect payment or transfer a title, it is necessary to have the original document in hand.
• Abstraction: The credit instrument is detached from the underlying cause. This means that, once issued, the instrument stands on its own, regardless of any problems or issues related to the origin of the transaction that generated it. This principle provides greater fluidity and security in negotiations.