Transferable Letters of Credit, Non-transferable Letters of Credit, Assignment of Proceeds

EXPORT DEPARTMENT
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Transferable versus
Non-transferable Letters of Credit

A letter of credit (L/C) can be transferable or non-transferable. The L/C usually indicates "transferable" in the case of a transferable credit. In the absence of such indication, the L/C is deemed to be non-transferable.

Assignment of Proceeds

In a non-transferable letter of credit, the beneficiary may assign any proceeds that he/she may be entitled under the L/C, but not the right to perform under the L/C.

The assignment of proceeds is not limited to a non-transferable L/C, all letters of credit are assignable.

In layman's parlance, the assignment of proceeds means that you (the assignee), as a supplier to the exporter (the beneficiary of L/C), are assured by bank of being paid first when the beneficiary (exporter) negotiates the L/C, and the balance amount goes to the beneficiary (exporter).

Payment of assignment fees to the bank is made by the exporter, unless agreed otherwise.

In practice, few suppliers and banks are willing to accept payment by assignment, especially when the exporter is new or when more than one assignee is involved in a settlement. Assignment of proceeds is, in fact, not a guarantee of payment. It relies on the ability of the exporter to perform under the L/C. If the exporter fails to meet the L/C requirements, he/she cannot negotiate the L/C. Consequently, the assignment is rendered useless.

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