An Aval is a formal assurance or guarantee that a third party adds to a debt obligation or a contractual document. The third party is not the payee or payer but a neutral person who attests that the holder will meet their responsibilities and debt obligations.
Avalize is an act of guaranteeing the obligations of a buyer to meet their responsibilities under a bill exchange, this process is carried out by a third party. Usually, when a person applies for a loan or is involved in a promissory note and purchase agreement, a third party avals the document, stating that all the debt obligations will be carried out by the individual.
A Little More on What is Avalize
A bank or any financial institution can aval a contractual document, this is a formal assurance that the buyer’s obligations will be carried out as contained in the contractual document. When a third party, bank or credit institutions guarantees the buyer’s obligations, it is acting as a cosigner for the buyer. automatically , if the buyer defaults in any of its obligations, the cosigner might be held responsible.
When banks or credit institutions avalize customers, certain qualities must be seen in the buyer. No third party, whether bank or credit institution will aval an insolvent buyer or customer, only solvent and lucrative customers can be avalized in order to reduce risks.
A third party only agrees to avalize a solvent and profitable buyer. contractual terms, such as invoices and sales contracts and other debt instruments often require a process of avalise. When companies or business owners apply for debt instruments, it is often to provide capital and financing or their business, before a debt can be issued, there are terms of contracts that the buyer must agree to live by.
When a third party, bank or credit institution guarantees that a buyer will carry out all debt obligations in the terms of contract, any default on this makes the guarantor or cosigner liable. These terms include principal, interest rate, liabilities, maturity date, issue date and others.
Invoices can be issued to enhance the security of buyers as guaranteed by the third party. Invoices can be created as a combination of several sales contracts, examples are mutual purchase contract, bond purchase contracts and others. The Federal Reserve Board (FED) also issue sales contract to institutional investors such as central banks. The United State government bonds can be sold under this contract.
The bond purchase contract is legally binding, underwriters play a major role in setting the terms of the contract. The issue price of the bond, interest rate, maturity date ,and the repayment terms of the bond are included in the bond purchase contract.
References for Avalized Draft
Academic Research for Avalized Draft
Documentary Risk in International Trade, Meral, Y. (2018). In Strategic Design and Innovative Thinking in Business Operations (pp. 413-431).
Options for Capital Financing, Guzik, M. (2011). In CFO Techniques (pp. 95-112). Apress.
Forfaiting: a user’s guide what is it, who uses it and why, Moran, J. (1999). Credit & Financial Management Review.
Negotiable Obligations for Discount: Notes, Acceptances, DPUs and BPOs, Dolan, J. F. (2013). Banking & Finance Law Review, 29(1), 103.
Negotiation Letters of Credit, Dolan, J. F. (2002). Negotiation Letters of Credit. Banking LJ, 119, 409.
Bank Aval, Jones, S. A. (2018).In Trade and Receivables Finance (pp. 177-189). Palgrave Macmillan, Cham.
Factoring and Forfaiting, Bhogal, T. S., & Trivedi, A. K. (2008). In International Trade Finance (pp. 132-142). Palgrave Macmillan, London.
Documentary collections as a method of payment in international sale transactions, Kotelo, M. A. (2015). (Doctoral dissertation, University of Johannesburg).
Banking Services: The impact of deregulation, Hogan, J., & Barclays Bank Plc. (1991). The European Marketplace, 187-194.
The Export Trade Note: A New Instrument for International Trade, Ludwig, E. A., & Coursey, M. J. (1986). Ga. J. Int’l & Comp. L., 16, 381.
Reduction of External Funding Needs, Mäntysaari, P. (2010). In The Law of Corporate Finance: General Principles and EU Law (pp. 21-82). Springer, Berlin, Heidelberg.
The European Monetary Union and Its Impact on Medium and Long-Term Trade Agreements, Marquis, M. (1997). ILSA J. Int’l & Comp. L., 4, 1199.