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 credit.

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 unilaterally.

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 inspection.

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.