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.
Transferable letter of credit allows the exporter to receive payment prior to the arrival of the merchandise. Therefore, these letters can be used as methods for export financing. The exporter can use the money from the issuing bank as a credit without having to incur in further debt.
A letter of credit will show inside its terms and conditions whether the document can be transferred o not. When it is, prior to the transfer the exporter needs to contact the bank in writing and request a disbursement of the funds. The bank will transfer the funds only as it has been established in the terms and conditions of the letter of credit created with the consent of the interested parties. The letter of credit may be received but payment will wait until it is confirmed.
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.
In order to simplify this procedure, many banks prefer to deal with single transfers instead of multiple ones. However, multiples transfers are performed when the conditions are appropriate. Partial transfers may be performed for one or more suppliers when the terms of the letter of credit allow it.
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