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.
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 LC Discounting 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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