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Avalised Bill of Exchange

Having a proper understanding of a bill of exchange itself is one thing however, having an avalised bill of exchange could be viewed as a different concept and provide a completely different meaning.

There’s a reason the bill of exchange was furthered and proper comprehension of what it means to have your bill avalised would be highly advantageous to you, the party that drafts the bill, or that party receiving the bill because it is still widely unknown or misunderstood by many of the banking and financial professionals and legal counsels.

A bill of exchange is an agreement that binds one party (the drawee) to pay a fixed amount of cash to another party (the payee) as of a predetermined date or on-demand which is normally ordered by another party (the drawer). Bills of exchange are most often used by international traders. Since other forms of payment have become more popular in recent times, the use of these types of bills of exchange has been on a steady decline.

A picture showing the exchange of money from a buyer to a seller

There are usually three entities that are involved in a bill of exchange transaction which include the drawer, the drawee, and the payee. Bills of Exchange are widely used in the business world for paying off debts and other international transactions, however, in their normal state, the payment by the debtor to the payee is not promised or assured. In order to solve this problem, the concept of an avalised bill of exchange was introduced. In order to fully comprehend what an avalised bill of exchange means we first have to understand what the word “avalise” means.

What does the word “Avalise” mean?

In business, to avalise means to involve and have a third party, (usually a bank or any other financial institution) endorse or guarantee the obligation of a buyer to a seller depending on the terms of their agreement, such as a bill of exchange or a purchase agreement. The bank or any other financial institution, by avalising the agreement serves as a guarantor in the transaction.

The act of avalizing can serve as a method of securing the rights of a receiving party in a transaction. It is an obligation that financial institution makes with their customers and is often viewed as an act of goodwill by both parties because it almost certainly guarantees a settlement in the transaction.

An avalised bill of exchange simply means a bank’s guarantee to keep to the payment of a Bill of Exchange. It is an unalterable, unconditional promise to make the required payment stated on the bill of exchange on the due date.

As previously stated, a bill of exchange on its own does not guarantee the payment by the drawee so, to obtain such a guarantee of payment it is vital to have the bill avalised by a bank, normally the drawee’s (debtor’s) account holding branch.

These Financial institutions or financiers normally handle the avalisation of bills of exchange. In this case, the bank (financial institution) simply acts as a guarantor for the payment, therefore, providing a certain level of assurance from the perspective of the payee. This simply means that the bank takes away the risk from the payee and makes that risk theirs which ensures that the transaction is held up by the drawer.

The process involved in avalising a bill of exchange

  1. Documentation
  2. Processing and acceptance
  3. Avalisation
  4. Endorsement


The drawer or the creditor will send the fully formed bill of exchange to his or her bank together with any other documents relevant to the transaction, for example, interest agreements or any importation documentation for the goods or services being used. If goods are involved in the transaction, they may or may not have been shipped or delivered at this point so there’s generally no rule of thumb and it just depends on the nature of the transaction or the agreement between the parties involved.

Please, it should be noted that it is not the duty of a bank or financial institution receiving these relevant documents to validate or investigate the documentation, therefore, both parties involved in the transaction must ensure the clarity and validity of all any of the documentation that they involve when they send their bill of exchange to these banks or financial institutions.

Processing and Acceptance

The processing bank will send all the documents to the drawee’s or debtor’s bank with instructions not to release the documents until a Bill has been approved or accepted by the drawee and avalised by his or her bank. The bank will send the documents and the bill to the drawee’s bank on a “collection” basis which means that the release of the documents would be done only after the bill has been approved by the debtor and avalised by the bank.


The debtor’s bank sends the prepared bill to the drawee requiring him to accept the bill and authorize them to avalise it. The drawee accepts the bill and authorizes it by signing it and the bank can now avalise the bill.


This is a process whereby the bank will then add its guarantee and record a liability against the debtor that will remain in place until the bill transaction is honored by the debtor and all the necessary payments have been made. This is essentially an endorsement that the bank or the financial institution makes in order to ensure that the transaction is honored.

Cost of avalising a bill of exchange

The cost of avalising a bill of exchange varies depending on where you are situated geographically. However, we can provide an estimate just to give you a fair idea of what to expect when want to get your bill avalised. The financial institution that adds its aval will make a charge which is payable by their customer, the drawee.

As previously stated we cannot be specific as to the percentage of this charge because it would vary from location to location, however, as a guide most financial institutions may place their guarantee charging on a ‘base’ rate of around 2 – 3% p.a, charged on a quarterly or monthly basis (depending on the agreed-upon terms).

The financial institution would normally set a service fee for avalising a bill, as this is normal because it is just like any other service given by banking or financial institutions to its customers like any other transaction that the bank carries out, for example, creating drafts, making transfers, deposits and so on.

When the avalised bill is issued, it forces a direct payment obligation to the bank or financial institution involved and it needs to treat it with full capital provisioning. Regardless of the costs involved in obtaining an avalised bill of exchange, avalising your bills would surely pay dividends to you because it assures that you are paid what you are owed in the exact time specified in your transaction.

Why choose an avalised bill of exchange?

Like any business transaction, the seller would always love a guarantee of his or her payment once he or she delivers the goods or services as required. In simple terms, no one likes to be owed.

Therefore, if you want to increase your chances of collecting your invoice payments then getting your bills avalised would be your best bet. In this age with massive technological advancements, the avalised bill of exchange may fall short of some other better and improved payment options like MasterCard, PayPal, skrill, and other forms of internationally accepted payment options, but it still offers many great benefits.

The introduction and acceptance of a bill of exchange in your transaction stand as a formal commitment by the parties involved. This means that you are a hundred percent certain of receiving full payment on the due date of your invoice. Another reason that you would choose an avalised bill of exchange is that not a lot of people in the financial world truly have a firm grasp of the meaning of the concept.

Therefore, knowledge of avalisation gives you an edge over your competitors in the sense that they may be using many other forms of payment which may not necessarily guarantee that they’ll receive their payments in time and some may even use the bill of exchange but have no idea on what avalising it would mean for their businesses. Therefore, just the knowledge of avalising your bills gives you a competitive advantage and though it may not seem like much, in business a one percent edge could mean more than you know.

The Difference Between Letter of Credit and Avalised Bill of Exchange

A letter of credit and an Avalised bill of exchange are often used interchangeably by people in the financial world, however, there are differences between them. When you obtain an avalised bill of exchange, the level of security offered by the avalised bill is close to that of a letter of credit, in the sense that the drawer’s bank is providing a guarantee of payment.

In the case of an avalised bill, it must be remembered that the insurance provided by the financial institution covers the term of the bill following acceptance and authorization by the drawer and is avalised by the bank. In some cases, the guarantee will not be provided until the goods or services have been provided and all the associated documents have been validated through the banking system on “collection” however, the payee can retain constructive control over the agreed-upon goods to a certain degree if the documents include a full set of original bills of lading.

Documentary letters of credit are issued by the drawer’s bank before the goods are delivered and they are normally prior to the manufacture or sourcing of the goods or services, thus providing the endorsement at an earlier stage, but it’s still subject to the presentation of specific documents which are in line with the letter of credit.

The costs involved in the acquisition of a letter of credit are likely to be far higher than that of an avalised bill of exchange because of the longer “risk” period that the bank is exposed to as well as the increased processing (vetting, authentication, amending L/Cs and scrutinization of the documents).

A payee is likely to pay no more than a standard term collection (documents against acceptance), however, the drawee will pay the bank’s avalising or guarantee commission as outlined above in addition to the standard collection charges.

Practical Application of Avalised Bill of Exchange

Theoretically, using the bill of exchange may sound easy but you need to understand the practical application of the Avalised bill of exchange. Assuming the bank avalising the bill has a good reputation among the locals, is located in a relatively politically and economically stable country, and is accepted by the payee’s bank (or an alternative financial institution in the exporter’s country), the avalised bill may be provided at a discount, providing the payee with 100% irrevocable funds at any time up to the completion of the transaction on the bill.

It is advisable that the payee communicates with their bank (or any other financial institution) before accepting and authorizing the avalisation of a bill. This is done to examine if the bank is prepared to offer such a service and the costs involved in financing such as service.

The financial institutions will normally require the following information:

  • The Value
  • Term of the bill of exchange (for example, 60 days from the date of the bill)- this is subject to agreement between the parties involved in the transaction.
  • The Avalising bank name and location.
  • The transaction details, ie: buyer goods end user.

Things to note

  1. Avalisation can only be applied to bills of exchange that mature at a future date. This means that when avalising your bill you must make sure that the terms agreed are to be completed sometime in the future. It is up to the parties to discuss whether the goods or services would be delivered before or after the payment has been completed.
  2. Once the bill of exchange has been avalised it cannot be annulled or canceled without the drawer’s consent and is in effect an unconditional guarantee.
  3. The avalised bill is only as secure as the security of the bank providing it and as so should be examined with caution. The financial strength of the bank and the economical stability of the country in which the aval is arranged should be checked with the banks or any financial institution that is being used. Though the avalised bill itself means that your payment is assured, the credentials of the bank providing the endorsement also have to be examined to ensure that all the grounds are level.
  4. It is crucial that the avalised bill is obtained prior to the payee’s transfer or delivery of the goods or services to the debtor. This could be achieved in many ways like delaying shipment of the goods until the avalised bill has been received or accepted, or ensuring the documents of title to the goods, the complete bunch of original bills of Lading, remain under their control until the avalised bill is received. This can be achieved by sending the documents via the banks on a collection basis as previously stated.
  5. It is also advised that the drawer obtain an agreement for the drawee to arrange for with bankers to avalise the bill prior to presenting it for authentication and acceptance.