Letters of Credit can be considered as an important payment method in international trade for various reasons. As an example, they cannot only reduce the risks of the parties of the transaction to acceptable limits, but also they have a flexible structure, which makes them suitable for applying to different scenarios successfully.
Transferable letter of credit is a sort of a documentary credit which can be used in situations where middlemen are playing a certain role. Usually middlemen (first beneficiary) do not have enough capital establishment to buy the goods from their sources (second beneficiary) before they re-sell them to their final customers (applicant). If the final buyer finds it valuable working with an intermediary for a definite foreign trade transaction, he can let the intermediary benefit from his credibility by supplying him a transferable letter of credit.
The middleman than have the part or all of the transferable letter of credit transferred to his supplier who has gained considerable payment assurance to ship the goods. The supplier can acquire its payment portion in exchange for the complying documents stated in the letter of credit. The intermediary is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism.
Important Points of Consideration
Transferable letters of credit should be issued in an irrevocable form.
A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is “transferable”.
A bank is not obligated to transfer a credit.
A transferable letter of credit can be transferred to more than one second beneficiary as long as credit allows partial shipments.
The terms and conditions of the original credit must be indicated exactly in the transferred credit. However, in order to keep the workability of the transferable letter of credit below figures can be reduced or curtailed.
- Letter of credit amount
- Any unit price of the merchandise (if stated)
- The expiry date
- The presentation period or
- The latest shipment date or given period for shipment.
The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if a document other than invoice required in the transferable credit must be issued in a way to show the applicant’s name, in such a case, that requirement must be indicated in the transferred credit.
Transferred credit cannot be transferred once again to any third beneficiary according to the request of the second beneficiary.
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