FOR THE BENEFICIARY (THE SELLER/EXPORTER)
Payment is guaranteed as long as you comply with the terms and conditions of the documentary letter of credit.
You are protected against the inability to pay or bankruptcy of the buyer. The issuing bank assumes credit risk when issuing the DLC.
Reduce the collection time of accounts receivable as the DLC speeds up payment for goods sold.
You will find it easier to receive bank financing since you can often use the documentary letter of credit as collateral.
Transferable letter of credit
A transferable letter of credit is a credit facility that the first beneficiary can transfer to another party or to the second beneficiary. Said financial guarantee is applicable when the sellers of goods are agents/dealers and are not the suppliers or manufacturers themselves.
This LC gives the sellers the authority to advise the bank to make the credit available in whole or in part to one or more second beneficiaries.
In this arrangement, the first beneficiary has the right to pass the available credit to the secondary beneficiary, which may involve more than one party. This is only possible when the buyer marks the LC as transferable to the issuing bank.
Why is a transferable letter of credit required?
Most transfers involve a beneficiary of the LC, usually a seller, who has a pending sale but is unable to fill the manufacturer’s merchandise order on an open account. Export brokers generally use transferable LCs. By transferring a part of the export LC to the manufacturer, the broker can take advantage of the buyer’s bank credit. This is done by providing the manufacturer with a guarantee of payment if it complies with the terms and conditions of the transferable LC.
Transferable Letter of Credit Insurance Calculation
The percentage for which insurance coverage must be effected on a transferable LC may be increased up to providing the amount of coverage mentioned in the credit. The coverage of the insurance policy is up to 110% of the value of the invoice, in the currency of the invoice on behalf of the banks, and covers all the risks mentioned in the standard clause of the contract.
If an overdeck shipping arrangement is permitted under the LC, the insurance must also cover the risk of discarding the goods or having the goods washed overboard. The validity of the insurance must align with the LC or the terms of the contract.
What is the risk associated with a transferable LC?
In some cases, the seller may find it difficult to comply with the terms of the LC and may request the buyer to modify the LC due to the following reasons.
The seller is unable to meet the agreed shipping schedule
Stipulations on freight costs are not acceptable
Exchange rate fluctuations are making trading less profitable or may even lead to losses
The quantity of product ordered does not match the agreed terms and expectations
The specified documents are difficult or impossible to obtain
When problems arise so late in the trading process, the buyer’s and seller’s banks try to negotiate. This may result in a delay in the execution and completion of the transaction. It is also important to note that if the documents do not conform to the LC specifications, the buyer’s issuing bank is not required to make the payment. Since most LCs are irrevocable, it may not be easy to make amends at times.
WHAT CANNOT BE CHANGED WHEN TRANSFERRING THE LETTER OF CREDIT?
The terms and conditions mentioned in the original Letter of Credit cannot be changed while the LC is being transferred.
What can be changed in a transferable Letter of Credit?
The following can be changed in a transferable Letter of Credit :
-Letter of Credit Quantity
-The unit price of the goods.
-shipping time
-The last date for the presentation of documents.
-The expiration date of the Letter of Credit
Here is the trading procedure of LAKAY BUSINESS for a Letter of credit or Standby letter of credit.
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[…] payment method. Two popular options are Standby Letters of Credit (SBLCs) and Letters of Credit (LCs). While both offer a level of financial security for buyers and sellers, there are important […]