Transferable Letter of Credit
For many years, I have had the privilege to teach workshops and seminars at the World Trade Center Denver. One session suits companies who have just begun exporting, or exploring the possibilities. My presentation discusses the basic methods of payment used by exporters. One morning, upon completion of my presentation, a gentleman came up to me and said, “Roy, we must have lunch today.”
I looked up to see a tall broad-shouldered man, and replied, “Yes sir. We will have lunch.”
World's Largest Aquarium
At a nearby restaurant, Norm told me his story. He anticipated bidding on a project in Taiwan. The Ministry of Education planned to build the world’s largest aquarium. Norm intended to supply the life support systems – pumps, valves, filters, etc. He was a sales representative, not a manufacturer.
He planned to purchase goods from 17 different vendors, arrange for their export and manage the installation in Taiwan. He wanted to know if any tools were available to enable him to pay the manufacturers.
Transferable Letter of Credit
When he told me he didn’t know about transferable letters of credit, I drew a flowchart on a paper napkin in the restaurant, illustrating how a bank could take a letter of credit issued to him and parcel it to vendors. He would not need to put up his own money. “I need exactly this mechanism to make this transaction work,” he remarked.
When I asked him if he had previous experience exporting, he answered, “No.”
Next I inquired if any of the 17 suppliers have had experience exporting, and he replied, “A few, but most of them haven't.”
I saved my biggest question for last, “How big will this contract be?”
Only the calmness of his voice kept me from falling off my chair as he said, “About $9,000,000!”
The transaction developed successfully and he received a letter of credit in transferable form. He requested the bank to transfer it to 17 other parties. I am pleased to report that due to cooperation among all vendors, freight forwarders and banks, they made over 100 shipments and all vendors received the payments due them.