Note: Terms used in the forfaiting jargon, do not always correspond with their use in other financial markets.
Inseparable from the financial instrument and effectively gives a guarantee and is abstract from the performance of the underlying trade contract. The 1930 Geneva Convention on Bills of Exchange says that the "aval" can be written on the bill itself or on a slip affixed thereto called an "allonge". In certain countries an aval may have an indeterminate legal status and a guarantee may be used as an alternative. The guarantor per aval is a primary obligor.
The person, bank (usually) or financial entity who give the aval.
Bill of Exchange
A negotiable instrument which is drawn on the importer/obligor by the exporter and accepted by the importer/obligor and returned to the exporter as the payment mechanism for the underlying obligation of the Importer. Value can be transferred by endorsement.
Bill of Lading
Bills of lading are pieces of paper, which are issued when goods are loaded on a vessel based on a contract between the shipper and the exporter. This document conveys all rights to the shipped goods by its bearer.
This is similar to a letter of guarantee, historically used in central Europe; crucially it is not abstracted from but dependent on the satisfactory fulfilment of the underlying transaction.
Certificate of inspection
Some countries and purchasers may require a certificate of inspection, usually given by an accredited third party, confirming the specifications of the goods shipped.
Certificate of origin
Certain countries require a signed statement as to the origin of the export item.
The French ECA.
The commercial invoice is a bill for the goods from the exporter to the importer. A commercial invoice will include basic information about the transaction.
The fee charged for the commitment period by the forfaiter and paid by the exporter (or seller in the secondary market) subject to the terms and conditions of the forfaiting contract.
The period from the date of signing of the forfaiting contract between the exporter/seller of paper and the forfaiter and the value date.
An obligation of both the forfaiter and the exporter to stand by the terms and conditions of a forfaiting contract signed by them.
An entity selling/buying assets/obligations with another entity.
The part of the discount rate over and above the cost of funding. The credit margin will reflect the perceived credit risk of the importer/guarantor and its country for the respective credit period.
Days of grace
Additional days added to the time period of the obligation to take into account, through experience, settlement delays associated with certain countries and or guaranteeing/avalizing banks.
The rate at which the face value of the bill or note is discounted to its present value. It is composed of an objective cost of carry for the period (such as LIBOR) and a margin for the perceived credit risk of the obligor/guarantor.
The process of delivering title, shipping and related documents for the goods exported.
Export credit agencies are state bodies or institutions for assisting exporters in industrialized countries sell their goods by guaranteeing the credit payment (in part or in full) in industrializing countries.
Export Credit Guarantee Department, the British ECA.
The United States of America and Japan and others, ECA
Exporters in certain countries are required by their government or state bodies to obtain an export licence. This often relates to certain types of goods or the purchasing country.
The value shown on a promissory note or bill of exchange and is the amount due at maturity.
An individual or financial entity that arranges a forfaiting contract directly with an exporter and then holds or sells on the payment obligations of the importer/guarantor.
An individual or financial entity that buys (other than from the exporter) or sells the payment obligations of the importer/guarantor.
A sum paid by the importer, usually as a percentage per annum of the average face value of the bills or notes outstanding, to the avalizing/guaranteeing bank.
A letter of guarantee is a document signed by the guarantor in which the guarantor irrevocably and unconditionally undertakes to pay a series of promissory notes or bills of exchange on their due dates if the obligor fails to make payment due at maturity.
The person, bank or financial entity who gives the guarantee for the importer.
The German ECA.
Importers in certain countries are required by their government or state bodies to obtain an import licence, usually allocating foreign exchange to future payment obligations.
If the seller provides insurance, the insurance certificate states the amount and type of cover.
Interest rate risk
Promissory notes and bills of exchange in their usual form have a face value reduced by the discount rate for the tenor of the period of the note to their present value. This means the instrument is a fixed rate instrument and if the holder does not match the funding period or buy a derivative hedge then they will carry an interest rate risk.
London Interbank Offered Rate, the free market objective interest rate at which banks offer funds to other banks of a certain perceived market standing.
The date of the payment obligation. The holder will often have sent (presented) the relevant bill or note up to four weeks prior to the maturity date to the avalizing or guaranteeing entity for payment.
Italian state-owned export agency.
A written financial undertaking by means of which ownership to a future obligation can be transferred between two parties, usually by endorsement.
See without-recourse debt.
The fee covering an option period charged by the forfaiter and paid by the exporter subject to terms and conditions of the forfaiting contract.
From the date of signing of the forfaiting contract, to either the signing of the underlying trade contract or its expiry date.
An obligation on both the forfaiter and the exporter to stand by the terms and conditions of a forfaiting contract signed by them, provided that in due course the underlying sales contract between the exporter and the importer is signed.
Usually short-term funding to fund the inventory and production costs associated with manufacturing goods for export.
A negotiable instrument which is drawn/issued by the importer to the order of the exporter, and accepted/taken by the exporter as the payment mechanism for the underlying obligation of the importer. Value can be transferred by endorsement.
The loading date on a vessel, aeroplane or truck. Also often the trigger date for setting the period to the maturity dates of the negotiable instrument(s).
This is in effect a counter-guarantee. Given by an entity outside the importer's country to the exporter usually on a sight letter of credit, without reference to the importer or importer's guarantor and is intended thereby to reduce the credit risk to the exporter.
Stand-by letter of credit
This is a form of guarantee rather than a documentary letter of credit. It is issued under the importer's instructions by a bank in favour of the beneficiary, it is irrevocable and unconditional subject to the presentation of certain documentation as defined in the stand by letter of credit.
Period of promissory note or bill of exchange from the issue date until its maturity date in the primary market, from the purchase/sale date to maturity in the secondary market.
Purchase of a debt obligation subject to the right to cancel the purchase if certain conditions are not met. These conditions are usually documentary such as to establish that the debt obligation being bought and sold is valid and legally binding on the issuer/guarantor.
Simply the date on which the purchase price for documents is being transferred.
A debt obligation on which the right of recourse towards the seller has been surrendered by the buyer.