Many
lenders have experienced this familiar scenario: An organization, usually an
intermediary, claims to have arrived a big export contract. Likely
undercapitalized, they do not have the finances to purchase the item so they
can sell it at an attractive profit. They do have, or claim they can get, a LC Discounting score in the
payment of the final sale once they ship the goods.
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| LC Discounting |
Approaches of LC Discounting
The
intermediary approaches a financial institution thinking that the lender would
not turn down the financing for a deal this profitable. First, the organization
demands an advance, or a loan, since they have a LC Discounting score as a source of repayment. The
organization soon understands, however, that financial institutions in the
United States do not create loans against characters of credit score because of
performance risk.
What
if the intermediary fails to execute precisely according to the terms of a
correspondence of credit? In that case they might not get paid and,
consequently, they may not be able to repay the loan. Not easily discouraged,
however, the exporter comes up with the next best idea. Since the intermediary
has a letter of credit score in hand, he demands the lender to problem a second LC Discounting score to the provider of the item. The first correspondence of
credit score would represent the security for the second correspondence of
credit score.
This arrangement is often known as a back-to-back correspondence
of credit score, which is also sometimes known as main and additional
characters of credit score, a mother and baby correspondence of credit score,
or a master and additional correspondence of credit score. Since
a U.S. financial institution will not agree to create a loan against a
correspondence of credit score, it will also refuse to problem a back-to-back LC Discounting score. Again, what if the lender has to pay for the additional
correspondence of credit score, but cannot collect on the main correspondence
of credit? Over the years, too many war stories have scared off most lenders.
Very
few, if any, U.S. institutions will amuse the notion of providing back-to-back LC Discounting score. This practice may vary in different nations and is, in
fact, quite routine in some Parts of Asia. Any financial institution in the
U.S. that would problem a back-to-back correspondence of credit score would
only consider doing so for well-established customers who have proven their
ability and expertise to execute correctly. Banks do, however, usually offer a
couple of alternatives: an assignment of continues or a transferable
correspondence of credit score. I’ll discuss these options in future articles.
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