A Practical Guide to Transferable Letters of Credit (LC)

A Practical Guide to Transferable Letters of Credit

Simplifying trade finance for intermediaries and suppliers.

What is a Transferable Letter of Credit?

A specialized financial tool that allows an intermediary (the "First Beneficiary") to transfer their payment rights to their end supplier (the "Second Beneficiary"). It's a single credit that securely connects three parties in a trade transaction, governed by UCP 600, Article 38.

The Key Players

Applicant (The Buyer)

The ultimate buyer who requests their bank to issue the letter of credit.

First Beneficiary (The Middleman)

The intermediary or trader who receives the LC and requests the transfer.

Second Beneficiary (The Supplier)

The actual manufacturer or supplier who receives the transferred portion of the credit.

Issuing Bank

The buyer's bank that issues the original transferable LC.

Transferring Bank

The bank (usually the advising bank) that facilitates the transfer from the 1st to the 2nd beneficiary.

The 7-Step Process Flow

Contract Agreement

The Buyer and Middleman agree on a sale using a "transferable" LC. The Middleman makes a similar agreement with their Supplier.

Issuance of Original Credit

The Buyer's bank issues the LC, clearly marked as "transferable," in favor of the Middleman.

Request for Transfer

The Middleman formally requests the Transferring Bank to transfer a part of the credit to their Supplier.

Shipment & Presentation

The Supplier ships the goods and presents their documents (invoice, etc.) to the Transferring Bank.

Invoice Substitution

The Middleman replaces the Supplier's invoice with their own, for a higher amount. The difference is their profit.

Presentation to Issuing Bank

The Transferring Bank sends the Middleman's substituted documents to the Buyer's Issuing Bank for payment.

Payment & Settlement

The Issuing Bank pays. The Transferring Bank pays the Supplier their due amount and credits the profit to the Middleman.

Key Rules (UCP 600, Art. 38)

Must be "Transferable"

The credit must explicitly state it is "transferable." Other terms like "assignable" or "divisible" don't count.

Single Transfer Only

A transferred credit cannot be transferred again by the Second Beneficiary to another party.

Bank Discretion

A bank is not obligated to transfer a credit unless it has expressly agreed to do so.

Charges are on 1st Beneficiary

Unless agreed otherwise, the Middleman (First Beneficiary) pays all transfer-related bank fees.

Permissible Alterations During Transfer

Can be Reduced

Credit amount & unit price
Expiry date
Presentation period
Latest shipment date

Can be Increased

Percentage for insurance cover

Who Benefits and How?

For the Middleman (1st Beneficiary)

Finance purchases without using their own capital.
Keeps profit margins confidential from both the buyer and supplier.
Maintains relationship with their buyer without revealing the supplier.

For the Supplier (2nd Beneficiary)

Gains strong payment security from a bank.
Payment is based on their own performance (presenting documents).
Reduces reliance on the middleman's financial stability.

How is it Different?

vs. Back-to-Back Credits

Back-to-Back involves two separate LCs. A "master" LC is used as collateral for the middleman's bank to issue a second, separate "baby" LC to the supplier. They are independent and riskier.

Transferable is one single LC that is simply extended to the supplier.

vs. Assignment of Proceeds

Assignment only transfers the right to receive payment. The assignee has no right to perform (i.e., present documents). It's a simple redirection of funds.

Transferable transfers the right to perform. The 2nd Beneficiary actively participates by presenting documents to get paid.