Understanding Revocable, Irrevocable and Transferable Letters of Credit
By Wade Henderson
Here we will show you three kinds of the most commonly known letters of
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 most popular of the documentary credit forms is the irrevocable letter of
credit. This one needs the consent of exporter, importer and issuing bank in
order to be modified or cancelled. It is appealing to exporters because they
payment for the merchandise is according to what the letter of credit
established and cannot be amended. Therefore an importer cannot decide not to
pay, or to pay later. Irrevocable letters of credit cannot be altered
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.
A transferable letter of credit can work as an instrument of export financing
because it allows the transfer of funds from the issuing bank and the exporter
does not have the need to use its own money to buy goods from its suppliers.
For a letter of credit to be transferred, the transfer needs to be indicated
in the terms of the letter of credit. Before the transfer, the exporter must
contact in writing with the bank for the disbursement of funds. The bank that
makes the transfer, whether or not letter of credit has been confirmed, is
required to make the transfer only to a point and how it is specifically
expressed in the letter of credit.
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
Banks that deal with these procedures efficiently frequently prefer singles
transfers rather than multiple ones. But in any case, banks will be willing to
perform more when the letter of credit allows it.
Wade Henderson - recognized professional - 15 years in the Business Finance
field - strong reputation for getting the deal done. IMMFinancial.com.