Revocable, Irrevocable And Transferable Letters Of Credit

There are different kinds of letters of credit depending on the restrictions that they have:

Revocable: A revocable letter of credit allows alterations, modifications and cancellations at any time without the consent of the exporter or beneficiary of the terms explained in the letter of credit. Because of the risk to the exporter, are not normally accepted.

The one that is most commonly used is the irrevocable letter of credit. Different from the one we mentioned before, this one does need the approval of exporter, importer and banks in order to be modified or cancelled. This letter of credit is particularly preferred by exporters because it leaves them with no surprise at the time of payment when the merchandise arrives at the port of entry. Irrevocable letters cannot be modified by one person only.

Transferable letters of credit need to be also irrevocable. Through these types of documents, the exporter transfers the right to the merchandise and the payment of the goods. They are often used when the exporter and the importer work together or are part of the same company, or in the case of intermediaries.

When a transferable letter of credit is used, the exporter uses the credit granted by the issuing bank and avoids borrowing or using its own funds to purchase goods from the vendor. Hence, it is a viable tool for pre-export financing.

In any case, the letter of credit will contain information that will determine whether it can be transferred or not. For banks to disburse the funds according to transferable letters, first it has to be indicated within the document; and second the exporter must contact the bank and request in writing the payment for the merchandise. The financial institution will review the letter of credit and determine whether it can or cannot be done.

A transferable letter of credit may carry many specific risks to the holder. For one, when a bank receives one of those letters, neither the bank nor the buyer knows the supplier properly.

Both parties must rely on the reputation of the importer and the exporter's ability to operate. In order to minimize the risk and prevent the shipment of goods of inferior quality, the document will require a separate certificate of inspection.

For simplicity, many banks prefer to transfer instead of simple multiple transfers, but there are multiple transfers if the conditions are correct. Partial transfers can be performed by one or more providers if the terms of the original letter of credit allow partial shipments.

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Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter Contract Standby Letter of Credit

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