Free Online Course in International BusinessTransferable CreditUnder a transferable letter of credit a beneficiary (the first beneficiary) can ask the issuing/advising/confirming bank to transfer the letter of credit in whole or in part to another party/ies such as supplier/s (second beneficiary/ies). A transferable letter of credit is usually used when the beneficiary is not the manufacturer/original supplier of some/all of the goods/services. This process enables the beneficiary to pay the manufacturer/original supplier by letter of credit. If the bank agrees, this bank, referred to as the transferring bank, advises the letter of credit to the second beneficiary/ies in the terms and conditions of the original letter of credit with certain constraints defined in Article 48 of UCP 500. In general, unless the letter of credit states that it is transferable, it is considered non-transferable.Assignment of ProceedsThe right to the proceeds of a letter of credit can sometimes be assigned where the beneficiary of a letter of credit is not the actual supplier of all or part of the letter of credit and wants the bank to pay the supplier out of funds received from the letter of credit. The beneficiary may choose this option if he or she• does not want to request a transferable letter of credit from a buyer in order to keep the buyer from knowing who is the actual supplier of the goods. • does not have the necessary credit with the bank to issue a new letter of credit to a supplier. An assignment of proceeds takes the form of an irrevocable instruction from the beneficiary to the bank requesting that it pay the supplier out of the proceeds of the letter of credit which becomes due when documents are presented in compliance with the terms of the letter of credit. RevolvingAlthough infrequently used today, revolving letters of credit were a tool created to allow companies conducting regular business to issue a letter of credit that could "roll-over" without the company having to reapply, thus enabling business flow to continue without interruption as long as the terms and conditions, quantities, and other transaction details did not change. In addition, if a letter of credit were a revolving one, there were few ways to stop it from rolling over; so, should a conflict arise between the parties while the letter of credit was in place or should the products change, there was little recourse for either party. In the business world today, the fact is that, unless required by law or because of high risk, on-going business is usually conducted without of letters of creditStandbyAs is the case with the revolving letter of credit, standby letters of credit are infrequently used today. A standby letter of credit is one which is issued as a back-up or form of insurance for the seller should the buyer default on the agreed-upon payment terms. A standby letter of credit is issued in the same way a documentary credit is in that the collateral needed for issuance is required by the issuing bank and the beneficiary must comply with every detail as outlined in the letter of credit. The problem with this instrument is that the applicant has no guarantee, other than the seller's word, that the standby will not be drawn against even if payment is made as agreed. This situation is challenging, especially if the letter of credit is confirmed and the advising bank sees only documents pertaining to the shipment as outlined in the letter of credit and has no knowledge of other payments being made.SummaryHaving completed this lesson, you should now understand the different types of letters of credit that are available. Although letters of credit can be issued in many forms, there are only a few that are regularly used today. By having a complete understanding of all forms, you can better negotiate payment terms and avoid agreeing to a situation that could increase your company's risks.ResourcesPublicationsExporting from Start to Finance 3rd Edition, L. Wells and K. Dulat, McGraw Hill.International Trade: Financial Services for Importers and Exporters, JP Morgan/Chase Bank, 2000. Handbook of International Credit Management, second edition, edited by B.W. Clarke. Gower Publishing, 1995. Practical Export Trade Finance, E. W Perry, Dow Jones-Irwin, 1989. The Global Entrepreneur, James Foley, 2nd Edition, Jamric Press, 2004. Web ResourcesInternational Chamber of Commerce - www.iccwbo.orgICC Resources - www.iccbooksusa.com Letters of Credit:• www.chase.com (FAQs)• www.informafinancial.com • www.allbusiness.com • www.qualitylc.com
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