| If you have to arrange security for your subcontractors or other parties, documentary credits offer the following options:
Irrevocable payment order
An irrevocable payment order assures third parties that money will not be paid to you before they received the amount due to them.
Be aware that payment orders are not subject to statutory regulations on debt. This means that, should you go bankrupt or suspend payments, an amount will be payable only after a court decision or arbitration.
Assignment
An assignment also ensures that third parties will be paid ahead of you.
Unlike an irrevocable payment order, however, an assignment is subject to statutory regulations on debt. This means that, in case of your bankruptcy or suspension of payments, an estate must respect the assignment.
Transferable documentary credit
If the documentary credit is issued as a transferable documentary credit, you can have it transferred, completely or in part, to a third party.
When you transfer a documentary credit, the following conditions can be changed:
- the amount and any unit price can be reduced
- validity, shipment and presentation limits can be shortened
- any insurance percentage rate can be raised
When documents are presented under a transferred documentary credit, it is possible for the beneficiary to replace the invoices and any drafts with its own. If the terms of the documentary credit are met, the beneficiary will receive the difference between the two invoices (less the bank’s commission, if applicable) and the balance is then paid to the third party.
One of the main advantages of a transferable documentary credit is that the credit exposure lies with the third party. However, one of the main risks with transferring a documentary credit is that the beneficiary is forced to use the other documents presented by the third party. Consequently any mistakes in these documents might be repeated under the original documentary credit. | | |