Transferable Letters of Credit
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Animated flow diagrams illustrating how transferable commercial letters of credit work. Part of a series on structures for mitigating risk in international trade and financing export sales. Extracted from training classes developed and conducted by Global Trade Risk Management Strategies LLC.
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Transferable Letters of Credit
- 1. Transferable Letters of Credit Global Trade Risk Management Strategies LLC
- 2. 2 Global Trade Risk Management Strategies LLC Contract 1 End-Buyer Middleman Transferable L/Cs Transfer of a letter of credit involves a middleman. The middleman has identified a buyer of a product that he has also identified a source of. The middleman signs a contract to sell the goods to this buyer.
- 3. 3 Global Trade Risk Management Strategies LLC Contract 1 End-Buyer Middleman Supplier Contract 2 Transferable L/Cs The middleman then turns around and signs a contract with the supplier. The contract with the end-buyer states that payment will be made by means of a transferable commercial letter of credit and the contract with the supplier states that payment will be made by means of a transfer of a commercial letter of credit.
- 4. 4 Global Trade Risk Management Strategies LLC End-Buyer SupplierMiddleman L/C Application Issuing Bank L/C Transferable L/Cs Contract 1 Contract 2 The end-buyer applies for a transferable letter of credit. His bank reviews the request, the end-buyer’s credit, etc. and, if satisfied, issues the L/C.
- 5. 5 Global Trade Risk Management Strategies LLC L/C Application L/C End-Buyer SupplierMiddleman Issuing Bank Transfer L/C Transfer Request Transferring Bank Transferable L/Cs Contract 1 Contract 2 The middleman requests that a transfer L/C be issued to the supplier. The transfer L/C will call for all of the same documents as the “master” L/C but may be for a lesser amount.
- 6. 6 Global Trade Risk Management Strategies LLC L/C Application Transfer L/CL/C Transfer Request End-Buyer SupplierMiddleman Issuing Bank Transferring Bank Goods Transferable L/Cs Contract 1 Contract 2 The supplier produces the goods and ships them to the end-buyer. (The middleman is not involved in production or shipment—the supplier must be in a position to handle this.)
- 7. 7 Global Trade Risk Management Strategies LLC L/C Application Transfer L/CL/C Transfer Request End-Buyer SupplierMiddleman Issuing Bank Transferring Bank Docu- ments Transferable L/Cs Goods Contract 1 Contract 2 The supplier collects and presents the documents called for in the transfer L/C. Recall that these are the same documents as required by the master L/C, though the invoice may be for less.
- 8. 8 Global Trade Risk Management Strategies LLC L/C Application Transfer L/CL/C Transfer Request End-Buyer SupplierMiddleman Issuing Bank Transferring Bank Invoice Docu- ments Transferable L/Cs Goods Contract 1 Contract 2 The middleman is notified that documents have been presented by the supplier and is given an opportunity to substitute his invoice, for a higher amount, for the invoice of the supplier.
- 9. 9 Global Trade Risk Management Strategies LLC $ L/C Application Transfer L/CL/C Transfer Request Docu- ments End-Buyer SupplierMiddleman Issuing Bank $ Transferring Bank Docu- ments $ Goods Transferable L/Cs Invoice Contract 1 Contract 2 The transferring bank submits the assembled documents to the issuing bank for examination and payment. Note that the transferring bank plays an administrative role and has no undertaking to pay until payment is received from the issuer.
- 10. 10 Global Trade Risk Management Strategies LLC L/C Application Transfer L/CL/C Transfer Request Docu- ments End-Buyer SupplierMiddleman Issuing Bank $ Transferring Bank $ Docu- ments $ Docu- ments $ Goods Transferable L/Cs Invoice Contract 1 Contract 2 The issuing bank charges the end-buyer (the L/C applicant) and delivers the documents to them. Note that the supplier’s invoice is NOT part of these documents.
- 11. 11 Global Trade Risk Management Strategies LLC Docu- ments Contract 1 End-Buyer SupplierMiddleman Contract 2 L/C Application Issuing Bank $ Transfer L/CL/C Transfer Request Transferring Bank $ Docu- ments $ Docu- ments $ Goods Transferable L/Cs Invoice The end-buyer uses the documents to pick up the goods, but is likely never to learn the identity of the actual supplier as the supplier’s name is probably not in the documents that the end-buyer receives.
- 12. This set of slides comes from training classes developed and taught by Global Trade Risk Management Strategies LLC. For Information about upcoming seminars and webinars, visit http://www.gtrisk.com/Upcoming_Seminars.html. Global Trade Risk Management Strategies LLC Credits