The 12-Month Contract: How to Structure Revolving Payments for Long-Term Security
Ifeanyi Francis3 min read·Just now--
In large-scale commodity trading, a 12-month contract is the ultimate goal. However, it presents a unique challenge: How do you guarantee a multi-million dollar deal for a full year without tying up the buyer’s entire credit line at once?
The answer lies in the Non-Cumulative Revolving Letter of Credit (DLC). Here is how to structure a revolving deal that protects the seller, satisfies the supplier, and keeps the buyer’s capital moving.
Defining the Revolving Mechanism
When you ask a buyer for a DLC that covers “3 shipments in advance,” you are creating a financial “buffer.”
- The Structure: If your contract is for 12 months, the DLC stays open for the full duration (usually 13 months to allow for final document processing).
- Non-Cumulative: This is a crucial term. It means that if the buyer doesn’t “use” the credit for one month, that value does not roll over to the next. It simply resets to the agreed-upon amount.
- The “Revolving” Flow: Think of it like a refillable cup. As the supplier takes payment for the first shipment from the “top” of the credit, the bank “refills” the value back to the 3-shipment maximum. This continues until the 10th shipment, at which point the value naturally tapers down as the contract reaches its end.
Why “3 Shipments” is the Magic Number
Technically, you can revolve a DLC with only one shipment’s value. However, this is dangerous for intermediaries.
- The Risk of 1-Value: If you only have one shipment of credit, you have to wait for the first payment to clear and the bank to “reset” the credit before you can load the second ship. Any delay in banking or paperwork could stall your entire supply chain.
- The 3-Value Advantage: Having three shipments in advance allows for “overlap.” You can have one ship at the destination port, one ship in transit, and one ship currently loading at the origin — all protected by the same financial instrument.
[Image: Diagram showing the overlapping cycle of three shipments: Loading, In-Transit, and Discharging]
Guarantees: The Intermediary’s Shield
You asked what “guarantees” the supplier and buyer that payments will continue for 12 months.
- For the Supplier: The guarantee is the Total Contract Value stated on the DLC. Even though the bank only pays for three shipments at a time, the DLC is “backed” by the buyer’s total commitment (e.g., $1.2 million for the year). The supplier is guaranteed that as long as they deliver “Clean” documents, the bank is obligated to pay.
- For the Intermediary: An intermediary cannot easily accept a “Bank Guarantee” (BG) because a BG is usually a separate instrument that doesn’t easily transfer to a supplier. By using a Revolving DLC, you are using a standard UCP 600 instrument that your supplier’s bank will recognize and accept.
Converting Pre-Advice to Full Credit
In high-level trades, we often use a Pre-Advised DLC.
- The buyer’s bank sends a “Pre-Advice” to your bank, signaling they are ready to move.
- The status converts to Full Credit only when you provide a PPI (Proof of Product) or an Evidence of Product Certificate.
- Article 38 of UCP 600: Ensure your offer stipulates that the buyer covers all transfer fees and banking charges. In a revolving deal, these fees occur every month; they must be the buyer’s responsibility to keep your profit margin intact.
Drafting Your “Principal” Contract
To be taken seriously by global suppliers and multi-million dollar buyers, you must move away from “filling in the blanks” on someone else’s form.
Pro Tip: Write your own contract template. Use a clean, professional font (like Arial or Courier), use double-line spacing, and number every paragraph. When you issue your contract in PDF form on your own letterhead, you are signaling that you are the Principal Seller.
“If you don’t write the contract yourself, you will never truly master the procedures.”
Final Strategy: The “Juicy Carrot”
If you find something missing or a term you don’t like in a supplier’s contract, don’t just complain. Approach them with a change while “dangling the carrot” — show them that the DLC is ready and waiting at the bank. Suppliers will almost always adjust their terms if they see that the money is real and the instrument is already pre-advised.
