Are transferable letters of credit a way to make money without money?
From time to time I am invited by publishers to review recently published books on the subject of International Trade. I enjoy the experience as most times I learn something new.
One particular book which caught my attention was titled “How to make money without having any money”. I thought this is a winner and got stuck in. To my surprise, the book addressed the usual areas of International Trade but I could not find the section on how to make money without having any money.
When I arrived at chapter six, the chapter heading read how to make money without having any money and the author simply said if you want to trade and don’t have funds available use a “Transferable Letter of Credit” and described for a whole paragraph telling his reader that they just ask the buyer for a Transferable Credit and use the credit to buy the goods from a third party to fulfill their contract with the buyer. That was it! Nothing more.
I was very disappointed as I thought after reading this book I could retire immediately and become a very rich man!
A transferable Letter of Credit can enable the seller to buy products of the sales contract from a third person without using their own funds. It is often used by middlemen.
I have often successfully traded under Transferable Letters of Credit to purchase high value goods without dipping into my own working funds but I must warn you they are not as simple to obtain and utilise as this author would like his reader to believe.
Lets first look at the definition of a Transferable Letter of Credit in my own words.
A Transferable Letter of Credit allows you to use the funds of the credit to open a fresh Letter of Credit on a third party. In other words, a Transferable Letter of Credit can be transferred to as many parties as you wish as long as the total you transfer does not exceed the amount of the original.
Let me give you a real world example of how we used a Transferable Letter of Credit to great success.
Some time ago, as a procurement house we received a request for a quote to supply and erect a leisure centre in Bengazi, Libya. We submitted our quotation and requested a Transferable Letter of Credit as we did not have the funds to support such a large Project. As it was in Libya we also asked for the credit to be confirmed. The value of the contract was £1.5 million.
Over a period of approximately four months we purchased a pre-fabricated building, all the accessories required and shipped everything to Benghazi. This was followed up by sending out steel erectors to erect the building and personnel to furnish it.
The project was a great success for all concerned but it was the busiest four months of my working life. Why? Because I had to visit about twenty suppliers and convince them to sell me their products on a Letter of Credit and ship them to Libya BEFORE they got paid. Not an easy task. I had to transfer the original Letter of Credit into individual ones, payable to each supplier. This took much negotiation as you can imagine.
Here are some of the pitfalls associated with Transferable credits:
- The buyer may not want to give you a transferable credit as they can be very expensive to establish.
- If you are not familiar with letters of credit and do not have a good track record of trading under a letter of credit, you can make costly mistakes with a transferable credit.
- Some suppliers take a lot of persuading to release their goods against a Transferable Letter of Credit especially when they have no previous experience of trading under such a credit.
- You may have to do a lot of “hand holding” with your supplier, have to instil confidence in them as to your ability to successfully negotiate the original credit and their spin off credit.
- You must be confident in your own ability to utilise a Transferable credit this comes about from hands on experience and training.
Our online International trade course is a no nonsense training course which includes in details of how to trade under a Transferable credit. For more information please contact us.
See below for a handy guide that we have developed on Letters of Credit: