Buddy,

You and others who spoke at the Symposium the other day mentioned using avalized drafts. This sounds like something that may work for me with a customer in Egypt. I tried researching to see how to transact this, but couldn't find much info. Can you recommend where I may go to find this info? I am wondering if it is the customer's bank that would provide the aval and how you go about requesting one and then discounting it.

SG

SG,

The most efficient way to get your buyer to sign a draft and also get their bank to add their aval is to use a documentary draft collection. First, your customer has to agree that this will be part of the credit terms and they need to make arrangements for their bank to add the aval, as it's an extension of credit similar to a letter of credit. Normally, you would not receive the avalized draft until after shipping, so you are taking a risk that the buyer might refuse to accept the draft or the bank might refuse to add their aval. (It is possible to get the avalized draft before shipping, but the buyer would be taking a risk that you could just cash it.)

Upon shipping, you gather up any documents the buyer will need in order to obtain the goods and clear customs on his end (invoices, transport documents, etc.) and send them to your bank to send to the buyer's bank for collection. The collection instructions must be "Deliver documents against acceptance and your avalization of the draft (contact us immediately if clarification is desired)." This parenthetical statement is recommended because this is unusual and you don't want an employee at the presenting bank to misunderstand what to do. The bank will not release the documents to the buyer unless and until the buyer accepts the draft and the bank adds their aval.

You should also indicate whether you want the buyer's bank to just notify your bank that the draft has been accepted and avalized and will be paid at maturity or you want the avalized draft returned to you. If you intend to sell the draft to your bank or a forfaiter like London Forfaiting, ask them whether they want the physical draft at the time you sell it to them--some purchasers are willing to let the draft sit at the avalizing bank if that bank will acknowledge that they've been instructed to pay the purchaser. There are multiple ways to handle selling the draft, so ask in advance what the purchaser wants. Indeed, it's fairly common to ask the intended purchaser to give you a written commitment that they will buy the draft once avalized and this commitment will spell out the mechanics.