Advantages and Disadvantages of Using a Transferable Letter of Credit
The process of acquiring a transferable letter of credit begins with the buyer applying to their bank for assessment and endorsement. Upon approval, the letter of credit is issued, allowing the initial beneficiary to transfer the credit to a second beneficiary. The transferable letter of credit is subject to specific criteria, with potential additional fees typically covered by the primary beneficiary.
Advantages of using a transferable letter of credit:
Risk Mitigation: A transferable letter of credit (TLC) diminishes the risk of non-payment for the supplier or manufacturer, ensuring payment from the buyer’s bank upon TLC compliance.
Enhanced Trust: By streamlining due diligence processes, TLC fosters trust among transaction participants, minimizing the need for extensive credit assessments.
Flexibility: Offering flexibility, a TLC empowers intermediaries to transfer portions or the entirety of the credit to secondary beneficiaries like suppliers or manufacturers.
Punctual Payments: Facilitating timely payments, a TLC secures prompt remittances for the supplier or manufacturer through the buyer’s bank.
These benefits position a TLC as an asset in international trade, mitigating payment risks, bolstering trust, providing adaptability, and ensuring prompt payments.
Disadvantages of using a transferable letter of credit:
Complexity and Cost: Utilizing a TLC can amplify transaction intricacies and expenses due to involvement from multiple parties, documents, and banks, necessitating meticulous oversight to maintain coherence across original and transferred credits.
Risk of Default: Sellers may encounter challenges in fulfilling TLC terms, potentially leading to amendment requests or non-compliance with agreed shipment timelines.
Potential Constraints: Certain TLCs may come with restrictions, such as mandating explicit authorization for transfers from the issuing bank, and the likelihood of non-recognition or refusal to process transfers in specific scenarios.
