Forfaiting Product Types

Letter of Credit

A Letter of Credit (Also referred to as an "L/C " or a "documentary letter of credit") is issued by an importer's bank in favour of the exporter. The L/C represents an undertaking by the issuing bank to pay the exporter once various details and conditions have been complied with.

The Letter of Credit is written ("opened" or "issued") by the importer's bank. The L/C will detail amongst other things the names of the importer (the "applicant") and the exporter (the "beneficiary"), a description of the goods to be shipped, the shipment date, the date upon which payment for the goods will be made and the documents required to be presented by the exporter to prove the shipment has taken place. Once all the terms within the L/C have been complied with (e.g. the correct shipment has been made within the dates stipulated in the L/C) and all the necessary documents have been made available to the opening bank, the L/C becomes an irrevocable undertaking by the opening bank to pay the beneficiary on the date stipulated in the L/C. In effect, the bank is granting its customer (the applicant) a line of credit for the specific import, while at the same time providing the beneficiary with an undertaking to pay the amount due.

Promissory Note

A Promissory Note is a simple debt obligation. The Promissory Note is a physical payment obligation usually payable to the exporter and issued by the importer. The Promissory Note is a negotiable instrument and is transferred by means of endorsement.

Two basic forms exist: the International Format which includes standard wording and no conditions; and a Long Format which may have conditions and extra details included in the wording of the Note.

The International Format Promissory Note is the traditional form used in all countries which are party to the 1930 Geneva Convention on Uniform Law on Bills of Exchange, Promissory Notes and Cheques. It will mention the clauses "for value received", "promise to pay", "effective" and "without deduction". Additionally, the date and place of issue and the maturity date will be included. A section on the Note may be reserved for the aval (see below) of a guaranteeing bank. At the bottom of the Note will appear the name and address of the institution where the Note should be presented for repayment at maturity.

A Long Format Promissory Note may be less readily acceptable to discounters depending on the wording incorporated.

Bill of Exchange

A Bill of Exchange is a standard document as defined by, and subject to the 1882 Bills of Exchange Act under English Law or the 1930 Geneva Convention on Uniform Law on Bills of Exchange, Promissory Notes and Cheques.

A Bill of Exchange is drawn up by the beneficiary (exporter) and accepted by the obligor (importer) who thereby acknowledges the obligation.

Again, the clauses "for value received", "promise to pay", "effective" and "without deduction" will be included as will the name and address of the institution where the Bill should be presented for repayment at maturity.

A Bill of Exchange (or Bill) is a fully negotiable debt instrument. Transfer of rights and benefits from the Bill passes when the Bill is endorsed in favour of a new owner. Usually this endorsement is made "without recourse" to prior holders or the original beneficiary (drawer).

Aval

Originally introduced in the 19th century under the Napoleonic Code, an aval may be written on either a Promissory Note or a Bill of Exchange and (subject to certain technical details) is in effect a guarantee made by the avalisor to make the payment at maturity regardless of whether the entity issuing (or accepting) the Note or Bill is capable of making the repayment. Because the aval is written on the original instrument, the aval is inseparable from the Note or Bill. The Aval may be given by an individual, a corporate entity or (most commonly) a bank.

Letter of Guarantee

Unlike an aval, a Letter of Guarantee (a Guarantee) is a separate document that will refer to specific details identifying the instrument being guaranteed. There is no standard wording for the text of a Guarantee, although certain clauses are typically included such as "irrevocable", "unconditional" and "freely transferable".

Usually the Guarantee will be valid until a date beyond the maturity of the document being guaranteed. As such, should there be a default under the original instrument, the holder of the debt has enough time to claim on the guarantor.