Assignment of Proceeds: Definition, Process, and Considerations

An assignment of proceeds refers to the process of redirecting all or part of the funds from a letter of credit to a third-party beneficiary. This transaction is commonly employed in various business scenarios to facilitate payments to suppliers, vendors, or creditors.

In international trade and commercial transactions, letters of credit serve as crucial financial instruments to ensure payment security. The original beneficiary of a letter of credit can opt to assign the proceeds to another party, known as an assignment of proceeds.

To initiate an assignment of proceeds, the original beneficiary must submit a request to the issuing financial institution, detailing the amount and recipient of the redirected funds. The financial institution evaluates the request and, upon approval, releases the funds to the specified third party. However, the original beneficiary remains responsible for fulfilling all obligations outlined in the letter of credit, even after assigning the proceeds.

Consider a scenario where Company A, based in Country X, purchases goods from Company B, located in Country Y. To secure the transaction, Company B requires Company A to obtain a letter of credit from a bank. Subsequently, Company B requests an assignment of proceeds, directing a portion of the funds to Supplier C, to settle outstanding debts for raw materials.

An assignment of proceeds does not absolve the original beneficiary of their responsibilities outlined in the letter of credit. They remain liable for fulfilling all contractual obligations, even after redirecting the funds to a third party.

Yes, multiple assignments of proceeds can be made for the same letter of credit, allowing the original beneficiary to allocate funds to multiple third-party beneficiaries as needed. However, each assignment must be approved by the issuing financial institution.

Once executed, an assignment of proceeds is typically irrevocable, meaning it cannot be reversed without the consent of all parties involved. However, specific terms and conditions may vary based on the agreement between the parties and the issuing financial institution.