Aval (Guarantee Bond)
An aval is a guarantee or surety bond issued by a bank or credit insurer on behalf of a customer in favor of a third party, without any cash changing hands.
Concept
An aval is a guarantee or surety bond issued by a bank or a specialized surety insurer on behalf of a customer in favor of a third party (the beneficiary). Unlike a cash loan, no liquid capital changes hands; the guarantor merely commits to stand in for the customer’s obligations if the customer fails to perform.
Typical Use Cases
Avals are commonly used as advance payment bonds, performance bonds, warranty bonds, or bid bonds in construction and plant engineering as well as in international trade, to secure contract performance vis-à-vis project owners.
Relevance for the Customer
Because no actual loan amount is disbursed under an aval, the capital tie-up for the aval holder is lower than with a conventional bank loan; nevertheless, the aval facility is regularly counted against the customer’s available credit lines, since a payment obligation can arise if the guarantee is called. Besides classic contract and warranty avals, avals are also used as customs bonds, for example under the ATA Carnet procedure for the temporary, duty-free import of goods; avals are increasingly issued electronically as e-avals and requested and managed through digital customer portals, which considerably speeds up what used to be a paper-based process.