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What is a non-transferable letter of credit?
Non-transferable letter of credit is a form of documentary credit that prohibits the assignment of its benefits to any other party. Learn more about it in the blog.
A letter of credit serves as a guarantee of payment between an importer and an exporter, providing assurance and security in trade transactions. As one of the types of letters of credit, the non-transferable letter of credit stands as a distinct category.
What is a non-transferable letter of credit?
A non-transferable letter of credit is a form of documentary credit that prohibits the partial or complete assignment of its benefits to any other party. It is issued in favor of a specific beneficiary, often an exporter. By default, a non-transferable LC is also irrevocable, meaning that the beneficiary cannot modify its terms or transfer the approved credit to other parties. However, the exporter can request the importer to issue a transferable letter of credit for such a situation.
Advantages of a non-transferable letter of credit
Below are a few advantages of a non-transferable letter of credit in international trade:
· Non-transferable LCs follow the standard process of documentary credit issuance, making it a straightforward option.
· They are a common and widely accepted form of documentary credit, providing familiarity and ease of use.
· This control minimizes risks and ensures that funds are disbursed to the intended party.
· Non-transferable LCs generally come with lower associated costs compared to transferable LCs.
· Non-transferable LCs offer exporters a secure and reliable form of financial guarantee.
· Non-transferable LCs follow the standard process of documentary credit issuance, making it a straightforward option.
· They are a common and widely accepted form of documentary credit, providing familiarity and ease of use.
· This control minimizes risks and ensures that funds are disbursed to the intended party.
· Non-transferable LCs generally come with lower associated costs compared to transferable LCs.
· Non-transferable LCs offer exporters a secure and reliable form of financial guarantee.
Disadvantages of a non-transferable letter of credit
Below are a few disadvantages of a non-transferable letter of credit:
· Non-transferability restricts the exporter from assigning or transferring credit.
· Unlike transferable letters of credit, non-transferable LCs do not provide the same level of cash flow advantages to the exporter.
· With a non-transferable LC, the exporter cannot use it as a means to assure their suppliers or subcontractors, which may limit their ability to secure favorable terms or negotiate better pricing.
· Brokers and middlemen involved in the trade may not find non-transferable LCs beneficial as alternative sources of finance, as they cannot leverage or assign credit to other parties.
· Non-transferability of the letter of credit may put the importer at a disadvantage by limiting their negotiation power on pricing and terms in the trade deal.
· Non-transferability restricts the exporter from assigning or transferring credit.
· Unlike transferable letters of credit, non-transferable LCs do not provide the same level of cash flow advantages to the exporter.
· With a non-transferable LC, the exporter cannot use it as a means to assure their suppliers or subcontractors, which may limit their ability to secure favorable terms or negotiate better pricing.
· Brokers and middlemen involved in the trade may not find non-transferable LCs beneficial as alternative sources of finance, as they cannot leverage or assign credit to other parties.
· Non-transferability of the letter of credit may put the importer at a disadvantage by limiting their negotiation power on pricing and terms in the trade deal.
How do non-transferable letters of credit work?
The approval process for a non-transferable LC is the same as any other documentary credit. The importer approaches their bank to request for a non-transferable LC. The bank evaluates the creditworthiness of the applicant and approves it. However, the main limitation for an exporter lies in the inability to assign the approved credit. While the assignment of credit would be beneficial in such cases, a non-transferable letter of credit does not permit the assignment of credit to third parties by default. Once the exporter fulfills shipping terms for the goods, the importer’s bank can proceed with the release of the LC funds.
Things to keep in mind about a non-transferable letter of credit
When dealing with a non-transferable letter of credit, there are important factors to bear in mind:
· A non-transferable LC offers the same level of financial security as other types of LCs, ensuring payment to the beneficiary.
· The beneficiary of a non-transferable LC cannot modify any terms without the applicant's consent, limiting their flexibility in the transaction.
· The beneficiary cannot assign or transfer any portion of the approved credit to another party, maintaining the exclusivity of the credit.
· A non-transferable LC offers the same level of financial security as other types of LCs, ensuring payment to the beneficiary.
· The beneficiary of a non-transferable LC cannot modify any terms without the applicant's consent, limiting their flexibility in the transaction.
· The beneficiary cannot assign or transfer any portion of the approved credit to another party, maintaining the exclusivity of the credit.
Transferable vs non-transferable letter of credit
Transferable letter of credit
• 'Transferable' is mentioned
• Can transfer credit to one or more second beneficiaries
• Export manufacturers or traders are secondary beneficiaries.
• The first beneficiary is responsible for charges unless agreed otherwise
• Fraction of the LC can be transferred separately, as long as the total amount is not exceeded.
• Can transfer credit to one or more second beneficiaries
• Export manufacturers or traders are secondary beneficiaries.
• The first beneficiary is responsible for charges unless agreed otherwise
• Fraction of the LC can be transferred separately, as long as the total amount is not exceeded.
Non-transferable letter of credit
• No indication of transferability
• Cannot transfer credit to other parties
• Cannot transfer credit to third beneficiaries, but can re-transfer to the first beneficiary
• The first beneficiary is responsible for charges unless agreed otherwise
• No provision for partial transfer
• Cannot transfer credit to other parties
• Cannot transfer credit to third beneficiaries, but can re-transfer to the first beneficiary
• The first beneficiary is responsible for charges unless agreed otherwise
• No provision for partial transfer
A non-transferable letter of credit provides financial security and convenience to both the importer and the exporter. By weighing the advantages, disadvantages, and differences between various types of letters of credit, you can choose the most suitable payment method to facilitate successful trade transactions while mitigating risks. However, if you export via e-commerce, you can directly sell your products to customers shopping on global marketplaces and receive payments directly to your account.
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Amazon Global Selling enables Indian exporters to register and sell their ‘Made in India’ products on 18+ international marketplaces across the world including Amazon USA, UK, Singapore, UAE, and more. It also provides support from experts at every stage of the export process including logistics and packaging through Fulfillment by Amazon (FBA). With free webinars and city-wise events for exporters, documentation support and more, Amazon simplifies exporting from India.
Frequently Asked Questions
What are the approval criteria for a non-transferable letter of credit?
The approval criteria for a non-transferable letter of credit is usually based on the creditworthiness of the applicant. The issuing bank assesses the applicant's credit profile and may require cash deposits or consider the applicant's regular balances with the bank. The specific requirements may vary among banks and depend on the nature of the trade transaction.
Published on September 29, 2023.
Sources:
1. https://www.accountinghub-online.com/non-transferable-letter-of-credit/
2. https://www.dripcapital.com/resources/blog/transferable-letter-of-credit-lc
Sources:
1. https://www.accountinghub-online.com/non-transferable-letter-of-credit/
2. https://www.dripcapital.com/resources/blog/transferable-letter-of-credit-lc
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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
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