LC for Middleman in the International trade

 

There are three special uses of commercial letters of credit for the import/export middleman: transferable, assignment of proceeds, and back-to-back L/Cs.

(1) Transferable LC:


Transfer must be made under the same terms and conditions with the following exceptions: amount, unit price, expiration date, shipping date. Buyer and supplier are usually disclosed to each other.

(2) Assignment of proceeds:


Supplier relies on middleman to comply with L/C so that he or she can be paid. Discrepancy in middleman's documents will prevent payment under L/C. Middleman instructs advising bank to effect payment to supplier when documents are negotiated.

Proceeds of all LC can be assigned. Buyer and supplier are usually disclosed to each other.

(3) Back-to-back LC:


Back-to-back LC requires credit line for middleman (the middleman is responsible for paying the second (backing) LC regardless of receipt of payment under the first (master) L/C). Middleman is responsible for paying the second (backing) L/C regardless of receipt of payment under first (master) L/C. substantial credit risk in that discrepancies on the first L/C will result in non-payment. L/Cs are issued on nearly identical terms. Middleman's ability to pay is a key consideration. L/C must allow third-party documents. Great care should be exercised when using this method because discrepancies on the first LC will result in nonpayment, and the middleman's ability to pay could be substantial credit risk. Back-to-back L/Cs should be issued on nearly identical terms and must allow for third-party documents.