Avalization

Exporters may require a third party, usually a bank, to guarantee payment of a bill of exchange drawn on an importer under a trade contract. This action, known as "avalisation", can be provided by a bank on behalf of the exporter upon request. By endorsing the bill on the back, the bank commits itself unconditionally to pay should the drawee default. An "avalised" bill substitutes the bank's risk for the importers risk thus providing the exporter with assurance that payment will be met. This bill can subsequently be discounted or used to negotiate better credit terms thus can enhance the trading relationship with the importer. Whereas an avalising bank assumes the credit risk of the importer, it plays no part in any independent document examination role and thus may not offer any comfort to the exporter.

Avalization is defined as the endorsement of a bill of exchange. It is the involvement of a third party whose role is to guarantee the obligations of the buyer as per the contract. By ‘Avalizing’ the document, they are acting as a co-signer on the contract, and thus share liability. When companies are trading overseas, the provision of an AVAL may be often necessary to make the instrument eligible for discount. One example of a document that utilizes the Avalization process is Promissory notes. Technically, a promissory note is a signed document that contains a promise of payment on a specified date. Promissory notes are used to source methods of finance that do not include a banking institution. Although this is generally true, Banks do also issue them.  This third party can be an individual or a company, the only requirement is they are willing to bear the liability. Since anyone can issue the Promissory Note, Avalization instils a lot of confidence in the transaction.