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The Exporter as First Beneficiary

At one extreme, an exporter might simply be a middleman, sourcing goods from suppliers who ship directly to the buyer. The exporter and his suppliers could all be paid under the same transferable Credit, with the exporter as first beneficiary and the suppliers as second beneficiaries.

This allows the exporter to make a profit without using his own bank facilities and at the same time allows the second beneficiary to do business against a transferred Credit, which provides a margin of safety.

For example, an irrevocable transferable Credit for £150 is issued in favour of an exporter (first beneficiary). He gets his supplier (second beneficiary) to ship the goods to his customer for £100. The exporter recovers £150 from his customer and achieves his profit by asking the Transferring Bank to transfer the Credit to the second beneficiary in the sum of £100. The transferred Credit shows the same goods as the original Credit, and all terms and conditions of the original Credit are incorporated into the transferred Credit. The following,

however, are changed in the transferred Credit:

  •  The amount is reduced to £100 any unit price stated in the original Credit is reduced to be consistent with the transferred Credit value
  •  The expiry date of the original Credit is brought forward, so that the exporter can substitute his own invoices for £150 for those of the second beneficiary and present documents under the original Credit within time
  • The last date for presenting documents is also brought forward to ensure compliance with the requirements of the original Credit (or with 500, Article 43, which requires that a Credit should stipulate a period of time after the date of shipment during which presentation should be made)
  • The period for shipment is reduced.

If the original Credit also calls for an insurance policy/certificate, the percentage of the transferred Credit allocated to insurance is adjusted to satisfy the cover required by the original Credit.

Once he ships the goods, the second beneficiary presents his documents to the Transferring Bank, which advises the exporter and requests his invoices for £150. The exporter’s invoices are substituted for the second beneficiary’s invoices and documents for £150 are presented to the Issuing Bank. When the £150 payment is received under the original Credit, the Transferring Bank pays £50 to the exporter and £100 to the second beneficiary.

A fundamental requirement for the exporter will be the need to make sure that the buyer is not made aware of:

  •   Who the second beneficiary is, or
  •  How much is being paid to him

since such information reveals the exporter’s own pricing and profit margins. The exporter must be guided by the Transferring Bank so that maximum confidentiality in respect of all dealings with the second beneficiary is maintained.

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The exporter as second beneficiary

In some sales contracts, it might be that the exporter’s own customer is the first beneficiary, in which case the exporter will be a second beneficiary. Either the end-buyer or the first beneficiary (or both) could be overseas. For example, a buyer might instruct his bank to establish an irrevocable, transferable Credit in favour of an EU beneficiary (first beneficiary) who instructs the Transferring Bank to make all or part of the Credit available to the exporter as second beneficiary.

Some of the following issues may need to be resolved:

  •  Is the original Credit confirmed?
  •  Is the transferred portion also confirmed (by the Transferring Bank) in acceptable terms?
  •  Is payment to be made upon presentation of documents to the Transferring Bank?
  •  Is payment to be subject to payment on the original Credit?
  •   If so, is the delay acceptable?
  •  Are goods to be shipped to a country where there is risk?

Back-to-back Credits

If the exporter is not the supplier but is acting as a middleman, he might ask his buyer to arrange for his (the buyer’s) bank to establish a Credit in his (the exporter’s) favour. At the same time, the exporter can ask his own Bank to establish an entirely separate Credit (called a back-to-back or counter-Credit) in favour of the ultimate supplier. As far as possible, the terms and conditions of the back-to-back Credit should match those  of the original Credit.

The exporter’s Bank would carefully examine the first Credit (in the exporter’s favour) in order to ensure that  the back-to-back Credit they open (in the ultimate supplier’s favour) calls for as many as possible of the same documents required by the first Credit. This would allow documents presented under the back-to-back Credit to be substituted for the documents required by the first.

The Bank would also ensure that the terms and conditions in the back-to-back Credit (including dates of shipment and payment) are stated in a way that makes it as likely as possible that the exporter will be paid on the presentation of documents under the first Credit before he is due to pay the supplier under the back-to-back Credit. This should allow him to use the proceeds from the first Credit to meet his liability under the back-to-back Credit.

However, the exporter should remember that he must still meet his liability to his Bank in respect of the backto-back Credit, even if he is not paid promptly (or at all) under the first Credit.



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