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My last article covered transferable letters of credit (LC) and how they may be a more acceptable alternative to a back-to-back letter of credit. This article is going to cover another alternative: an Assignment of Proceeds.
Again, let’s assume that we have a buyer, a broker/middleman, and a supplier/manufacturer. At the request of the broker, a buyer applies for a letter of credit, but this time there is no mention of the letter of credit needing to be transferable. The letter of credit is issued, sent to the advising bank who in turn advises it to the beneficiary, also known as the broker or middle man.
The beneficiary knows that their supplier wants some type of assurance that they will be paid, but the beneficiary wants to maintain a maximum amount of control over the transaction. An Assignment of Proceeds might just be the answer.
Assignment of Proceeds
Once the letter of credit is received, the beneficiary would approach their bank with the original letter of credit in hand and ask that a specific value of the original letter of credit be assigned to the supplier. For example, if the LC was issued for $45,000, the request for the assignment might be $30,000.
The bank will require the original letter of credit be presented along with the written request for the assignment. The bank needs the original LC so it can endorse the backside of the LC indicating that an assignment has been made to the named party and the value of the assignment. Remember, most letters of credit are freely negotiable, meaning that the beneficiary could present documents to any bank. By endorsing the LC, any bank that might receive documents will know that an assignment has been made.
Once the endorsement is taken care of, the bank will issue a document or letter titled Assignment of Proceeds addressed, in this case, to the supplier. The content of this document will indicate that an assignment of proceeds has been made in their favor with a stated value. It will also indicate that if and when payment is made under the letter of credit, payment will automatically be made under the assignment.
Now that the supplier is holding the Assignment of Proceeds they may feel confident that they will receive payment and release the merchandise to the middleman/beneficiary. If all goes according to plan, the beneficiary arranges shipment, obtains the documents necessary to draw against the LC, presents these documents to the bank, and the bank makes payment to both the beneficiary and to the holder of the assignment of proceeds.
Again, this may sound like the perfect solution for the buyer, broker/middleman and supplier, but could something go wrong with this approach? Unfortunately, yes.
With the Assignment in place, once the supplier turns over the merchandise to the broker/middleman, the supplier does lose control of the transaction. Worst case scenario would be that the supplier goes ahead and ships the merchandise to the buyer but also contacts them proposing that they not use the LC as the method of payment. They might even suggest that instead of the LC, they would be happy to offer open account terms. They may propose that after the buyer has received the merchandise, they could wire transfer payment.
The buyer, not knowing that an assignment of proceeds has been issued, may be thrilled at the prospect of not having to pay their bank an examination fee under the LC and embrace the open account proposal.
Meanwhile, we have the supplier sitting back patiently waiting for payment. After two or three weeks, they may contact the bank asking about the status of payment against the assignment only to hear that documents have yet to be presented against the letter of credit. The supplier will be referred to the line in the assignment of proceeds that payment will be made to them if and when payment under the letter of credit is made.
The supplier then tries to contact the broker/middleman, only to find out that the phone has been disconnected and they appear to have left town. The supplier’s prospect for payment at this point isn’t very good. For this very reason, suppliers or manufacturers may shy away from this arrangement. It’s never a perfect world!
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| CRV56H/3AS NTN | 34.925 | 88.9 | 52.3 |
| CRV52H/3AS NTN | 31.75 | 82.55 | 46 |