The Treasurer’s Guide to Trade Finance

Chapter 6 The use of documents in trade

Avalisation

The seller can reduce the risk of non-

payment by asking the buyer’s bank to

guarantee an accepted bill of exchange.

This is known as avalisation. In these

circumstances the seller is then exposed

to the credit risk of the buyer’s bank,

rather than that of the buyer itself.

7. Buyer’s bank sends payment to seller’s
   bank, if payment received, or a notice of
   acceptance, if bill accepted.
   The buyer’s bank will forward payment
   to the seller’s bank, perhaps through a
   correspondent bank, once received from
   the buyer. This will be either at sight or
   after payment of an accepted bill.
   8. Seller’s bank pays seller, if payment
   received, or holds accepted bill until
   maturity, if bill accepted.
   The seller’s bank will credit the seller on
   receipt of payment from the buyer’s bank.
   If issued, the seller’s bank will hold an
   accepted bill until maturity.

What can go wrong?

Under the terms of a documentary collection,

the banks are only concerned with the

exchange of documents. They offer no

guarantee of payment, unless the buyer’s

bank avalises an accepted bill of exchange.

As a result, the most significant risk to the

seller is that of non-payment.

If the documents are due to be released in

exchange for a sight payment and payment

is not received, the buyer’s bank will refuse

Case study

The use of avalisation to remove payment risk

A UK company was asked by foreign supplier to accelerate payment. The

supplier needed to receive cash by the end of the financial year to show an

improved balance sheet position.

The solution chosen was a traditional

one. The supplier drew a bill of exchange

on the UK company with a future date

for payment. The UK company accepted

the bill of exchange and asked its bank

to avalise the paper, i.e. to guarantee

payment on the due date. Avalisation

removed the payment risk associated

with the bill of exchange, which now

became a marketable instrument. The

UK company’s bank offered to accelerate

the cash to the supplier, less a discount,

which was accepted.

Both parties benefited from the

transaction. The supplier received the

accelerated cash and the UK company

was able to negotiate improved payment

terms when agreeing the transaction.

exchange, which is a commitment to pay

at the maturity of the bill. Once the buyer

has fulfilled its obligations to either pay

or accept the bill, the buyer’s bank will

release the documents to the buyer, giving

the buyer control of the goods.

If the buyer accepts a bill, the buyer’s

bank will hold the bill until maturity and then

present it to the buyer for payment. Under

a documentary collection, the buyer’s bank

does not guarantee payment of an accepted

bill, unless the bill is avalised.