Pros and Cons of Using a Transferrable Letter of Credit
If you are ready to take the plunge into the world of exports and imports, you must familiarize yourself with all the documents required for successful transactions. In any case, international trade involves transacting with unknown merchants and customers, and this means you need documents that will protect you from any potential losses. One important document used by importers and exporters is a Standby Letter of Credit (SBLC). A Letter of Credit is a guarantee issued by a bank to a supplier or manufacturer guaranteeing payment in case the buyer defaults. An LC can have a transferrable provision, meaning the first buyer can transfer his or her letter of credit to a middleman who sits between the importer and exporter. In this case, the LC becomes a transferrable Letter of Credit. In this post, we discuss the pros and cons of SBLC monetization and how an LC can help your business grow internationally.
Safe and Secure Payment Method
The biggest advantage of using a transferrable LC is that it is a guarantee the supplier will receive their dues. Whether you are an importer or an exporter, you can transact with international trade partners safely without even having to know them in person.
Better Cash Flow
An LC has all the transaction details, including the expected payment date and the amount of money to be paid. If you are the supplier, you can rest assured knowing your payment will arrive on time, allowing you to plan your financial needs early.
Another benefit of using transferable LCs is that they are highly customizable. All trade partners involved, including the secondary beneficiary, can add their terms and conditions to the agreement. Even better, you can make amendments from one transaction to another when dealing with the same trade partners.
Pre- Shipment Financing
Using a transferable letter of credit, the exporter or the second beneficiary (intermediary) can secure pre-shipment financing. This means the buyer or importer can ask the bank to pay the supplier even before shipping the goods to help fill any financing gaps.
Credit-Certificate for Buyer
An LC makes a buyer more creditworthy, meaning he or she can do more transactions with international trade partners when backed by a reputable financial institution.
The cons of a transferrable are not many, but one drawback that stands out is the tight expiry date associated with this type of agreement. The exporter has to deliver the goods within a given timeline to receive their pay.
When trading with international partners, you stand the risk of losing some cash due to currency fluctuations. Make sure the letter of credit uses the same currency to avoid Forex fluctuations.
If you need any assistance with drawing a transferrable letter of credit for your trade partners, find the right company. As an international trade finance company serving business owners in Dubai, you can find the right solution.