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Letter of Credit Assignment of Proceeds

Updated on September 8, 2010


Letter of Credit Assignment of Proceeds by Thomas H. Ward, MBA

Reading this article will make you a semi expert on the subject. For more information you can see my book Letters of Credit and Documentary Collections which can be found on line. Also see my other articles on Letters of Credit on Associated Content. This information is based on my 30 years of experience in international business operations.  Go to

One very powerful tool you can use if needed is the assignment of proceeds letter. This is a document that transfers all or part of the letter of credit’s proceeds to a third party beneficiary. To receive an assignment of proceeds letter, the letter of credit beneficiary needs to submit in writing a request to the advising bank to assign the funds as stated to a third party. Once this is approved, the advising bank will disperse the funds accordingly upon payment of the letter of credit by your customer.

The reason you may need this assignment of proceeds letter may be, for example, if you are purchasing a large dollar amount and your supplier will not provide you the necessary credit. You want to purchase and resell the item or items to your customer for a profit. In this case, you can send this assignment of proceeds letter from your bank to your supplier, which may take care of your credit problem. This proceeds letter will promise payment to your supplier from the proceeds of the letter of credit.

When using an assignment of proceeds letter, it is best to use a confirmed letter of credit for the transaction with your customer as this assures payment for the goods thereby assuring you  protection against none payment. So what are the advantages? The assignment assures payment protection for your supplier. Your supplier must agree to the use of the assignment letter. If you already have good business relations with our supplier it should not be a problem for them to accept. You may need to explain you are using a confirmed letter of credit so once the goods are shipped payment is assured and there is no risk. Your bank will send your supplier an official Assignment of Proceeds Letter advising the payment amount promised to them once the letter of credit is paid. Your bank will remit the payment directly to your supplier. In addition once the documents are submitted on a confirmed letter of credit payment usually is submitted in two or three weeks. 

Example: Your Company wants to purchase $100,000 worth of metal and resell it for $125,000 to a customer in China. Your supplier, however, will only give you credit to cover $50,000; and they want you to pay the balance in cash. So this means $50,000 cash out of your company account, which you may not have on hand.

Solution: Ask your customer to issue a confirmed letter of credit so you know the payment will be made without any doubt. Advise your supplier that you have a confirmed letter of credit and would like to do an assignment of proceeds letter, which means when you receive payment on the letter of credit, your bank will transfer the full amount of $100,000 to their account.

You could also offer to pay $50,000 Net 30 days and $50,000 by the assignment of proceeds letter. Using either method, you are not using up your cash flow in the transaction. So the main advantage of using this assignment letter is it can help your company cash flow. Your company makes $25,000 profit, your supplier is paid, and everyone is pleased.

It is interesting to note that your customer does not have any knowledge of the assignment of proceeds letter. This proceeds letter is between your company and your supplier. It is necessary to obtain a letter from your supplier stating that they will accept an assignment of proceeds letter and that they realize that your bank will submit the payment amount to your supplier when the LC is paid. Your bank will need a copy of this letter to proceed with the process.

The assignment of proceeds letter is much better to use than a transferable letter of credit mentioned in my earlier articles on letters of credit. A transferable LC can be very complicated, and it also gives your supplier the name and address of your customer. Most companies do not want the name of their customer and all those contacts given to any supplier. The supplier can become your competitor if you do not have an agreement or contract of some type.

By using this assignment of proceeds letter several times with your supplier it will provide them the trust in the future to give you the necessary credit. This is a very inexpensive method to improve your cash flow due to lack of credit.

Read my next article on International Shipping Methods and Export Regulations.



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