All you need to know about Letter of Credit Part- 3

Below are unique middleman uses of Letters of Credit:

 

There are 3 unique uses of commercial letters of credit for the import/export middleman: as transferable, as assignment of proceeds, and as back-to- back L/Cs.

 

-Transferable L/C s

 

The purchaser opens the L/C, which implies clearly that it is transferable, on the behalf of a middleman as the original recipient who in turn transfers all or part of the L/C to the exporter(s). The transfer must be made under the same conditions and terms as those in the original L/C with the below exceptions: amount, unit price, expiry date, and shipping date. In this instance the importer and exporter are generally disclosed to each other.

 

-Assignment of Proceeds

 

The assignment of proceeds is a method in which a typical letter of assignment is used. Note that the proceeds of all the letters of credit may be assigned. In this instance the importer opens the L/C as the recipient and depends on the middleman to comply so that the recipient can be paid. Any disagreement in middleman documents will avoid the payment under the L/C. The middleman directs the advising bank to effect the payment to the exporter when the documents are communicated. In this way, importers and exporters are not known to each other.

 

-Back- to-Back Letters of Credit

 

When choosing the back-to- back method, the middleman should have a line of credit because the middleman is accountable for paying the second (backing) L/C irrespective of receipt of payment under the first (master) L/C. Proper care should be taken when working on this method because disagreements on the first L/C will result in non-payment, and the middleman’s capacity to make the payment could be a big credit risk. Back-to- back L/Cs should be issued on closely identical conditions and should allow for third-party documents.

 

All the above 3 notes regarding letter of credit were in brief. Learn about the same in detail including every nuts and bolts only at iiiEM.

 

Related Post: Import Export Business

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