1. CHAPTER X FINANCING IMPORTS
Financing Imports by Using Buyer's L/C
Transferable Letter of Credit
Assignment of Proceeds of Letter of Credit
Back-to-Back Letter of Credit
Red Clause Letter of Credit
Copyright(c) 2012 Dr. Chase C. Rhee

2. Transferable Letter of Credit
Importer has his domestic buyer open an L/C in his favor (first beneficiary) containing a clause "This credit is transferable”, making it a Transferable L/C
Importer asks his bank to transfer original L/C to his overseas exporter in whole or part by filing an application for transfer with his bank.
Bank transfers L/C by sending a transferred L/C to Exporter (transferee, second beneficiary) containing the same terms and conditions as original L/C except for L/C amount, unit price, latest shipment date, expiry date, period of presentation and percentage of insurance coverage.
Copyright(c) 2012 Dr. Chase C. Rhee

3. Transferable Letter of Credit
Exporter makes shipments and presents shipping documents to his Bank
When the shipping documents arrive at L/C transferred bank, Importer (first beneficiary) substitutes his own draft and invoice in place of those of second beneficiary
Bank negotiates draft and shipping documents and pays first and second beneficiaries from the proceeds of negotiation.
If first beneficiary fails to provide required documents, negotiation is done with documents presented by second beneficiary. The first beneficiary cannot protest.
Copyright(c) 2012 Dr. Chase C. Rhee

4. Assignment of Proceeds of a Letter of Credit
Beneficiary has a right to assign any proceeds of LC to third parties without prior approval by issuing bank or buyer
Importer receives a domestic L/C made in his favor from a domestic buyer
Importer makes his bank send Assignment of Proceeds Letter to his oversea exporter.
Exporter ships goods and presents shipping documents to his bank.
When Importer’s bank receives shipping documents, it releases them to Importer.
Copyright(c) 2012 Dr. Chase C. Rhee

5. Assignment of Proceeds of a Letter of Credit
Importer clears goods and delivers to his domestic buyer and presents documents to his bank for negotiation under the domestic L/C
Bank negotiate draft and shipping documents presented by Importer and pays Exporter first from proceeds of negotiation and balance to Importer.
Overseas Exporter cannot get paid until Importer fulfills all obligations stipulated in his domestic L/C and negotiate his documents.
Copyright(c) 2012 Dr. Chase C. Rhee

6. Back-to-Back Letter of Credit
Importer receives L/C made in his favor from a domestic buyer (Master L/C)
Importer puts up Master L/C as collateral to his bank.
Bank opens a new L/C (Back-to-Back L/C) in favor of overseas Exporter with different requirements from Master L/C.
Exporter fulfills requirements in Back-to-Back L/C and presents his draft and shipping documents for negotiation to his Bank.
When Importer’s bank receives shipping documents, it pays Exporter and releases documents to Importer against Importer’s promissory note (loan)
Copyright(c) 2012 Dr. Chase C. Rhee

7. Back-to-Back Letter of Credit
Importer fulfills requirement in Master L/C and presents documents to his bank.
Upon negotiation, Bank pays off Importer’s promissory note (a loan) and pays Importer balance from proceeds of Master L/C.
Back-to-Back L/C is a separate, independent L/C from Master L/C. Even if Master L/C defaults, Back-to-Back L/C must be honored when all terms and conditions are met.
Copyright(c) 2012 Dr. Chase C. Rhee

8. Red Clause Letter of Credit
Importer has his domestic buyer open L/C with a special clause allowing advance payments (Red Clause) prior to shipment against clean draft or simple receipt.
Importer receives advance payment from Domestic L/C using Red clause and use it for his own operation or for deposit to overseas Exporter
When Importer fulfills requirements in the domestic L/C and presents documents to his Bank
Advance payment is deducted from the negotiated amount
Copyright(c) 2012 Dr. Chase C. Rhee