Letters of Credit – Assignment of Proceeds

There are three main ways that a beneficiary of a Documentary Letter of Credit (DC) can use the original DC to pay suppliers using the DC itself.

The first is to ask a bank to issue a Back to Back DC using the original DC as collateral.  This method has in the past, unfortunately, been shown to be vulnerable to fraudulent trading, and so now banks will rarely agree to cover the risk.

The second is to obtain a Transferable DC.  If the supplier and all banks involved in the transaction agree, it is possible for the original beneficiary to request that the bank at which the DC is available, to transfer part of the value of that DC to the supplier (always known as the second beneficiary).  It is possible for the original beneficiary to transfer to more than one supplier, but the total sum transferred must not exceed the value of the original DC. One of the main problems with this method is that in some countries, their fiscal policies do not allow DC’s originating from those countries to be transferable.

Assignment of Proceeds
The third way that a DC beneficiary can use a DC to pay suppliers is through an Assignment of Proceeds.  In UCP 600, this is covered by Article 39 which merely states that the beneficiary has the right to assign any proceeds from the DC to which they are entitled.

The procedure is as follows:

1.  Beneficiary receives a workable Documentary Credit.  They contact the negotiating bank and request that the bank send an irrevocable instruction in letter form to the supplier.  This letter will tell the supplier that the bank has received notification from the beneficiary to make the relevant payment to the supplier out of the credit proceeds.  The bank will charge the beneficiary a fee for this service.

2.  The beneficiary must advise the negotiating bank whether any bank charges should be taken from this payment.  The usual instruction is that all bank charges for the transaction should be borne by the beneficiary and that the supplier receives the full value of the agreed reimbursement (less any charges from their own bank, if applicable).

3.  Once this letter has been issued it is irrevocable and the funds will be transferred once the DC is successfully negotiated.  However, please note that the bank will not undertake any payment or guarantee towards the supplier: the bank is only acting as an agent for the payment of funds received from the negotiation of the DC.

There are a number of factors which need to be taken into consideration with an Assignment of Proceeds.  First, national law will determine the extent and legal affect of the assignment.  Secondly, any payment made to a supplier using this method is wholly dependent on the beneficiary of the DC submitting conforming documents on presentation. Thirdly, the bank cannot pay the supplier if they don’t have free use of the proceeds received from the DC.  Fourthly, it is much safer if the DC being negotiated is a confirmed one and this is a question that the supplier will need to ask the beneficiary prior to accepting Assignment of Proceeds.

The benefits to the supplier, however, is that they have no additional costs to pay in either bank charges (unless otherwise agreed) or time and that once the DC is successfully negotiated, they will receive payment within the agreed time limits of the DC itself.


Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other articles on International Trade on the Point to Point Export Services website at www.point-point.com

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