Professional Documents
Culture Documents
A transferable letter of credit is a credit facility that the first beneficiary can transfer to another party or the
second beneficiary. Such a financial guarantee is applicable when the sellers of goods are agents/dealers and
are not the suppliers or manufacturers themselves.
This LC gives the sellers the authority to advise the bank to make the credit available wholly or in part to
one or more second beneficiaries.
In this arrangement, the first beneficiary has the right to pass on the available credit to the secondary
beneficiary, which may involve more than one party. This is only possible when the buyer marks the LC as
transferable to the issuing bank.
A transferable LC includes the provision of extending the credit to the second beneficiary. So, in this
instance, the second beneficiary is responsible for paying off the loan.
If a shipment on deck arrangement is permitted under the LC, the insurance must also cover the risk of
discarding the goods or the goods getting washed overboard. The validity of the insurance should align with
the LC or contract terms.
Kento writes to its bank to issue a transferable LC. If the bank agrees to the request, United Services can
issue the transferable LC to its supplier, i.e., the secondary beneficiary.
The transferable LC process is as follows:- Issuance of LC Shipping of goods Providing documents to the
confirming bank Settlement of payment from importer and possession of goods
A back-to-back LC also acts as a credit document but with a bit of a difference. Here the agent/exporter/first
beneficiary can request the buyer to issue a transferable LC to endorse it further to the supplier or the
secondary beneficiary. If the LC is not transferable, it cannot be handed over to the supplier.
As read earlier, the first beneficiary (the exporter) can ask the paying bank to make the credit available
wholly or in part to one or more party or second beneficiaries in a transferable LC. Here, the second
beneficiary can be an export manufacturer or an export trader.
The first beneficiary or the exporter must pay all the charges involved in the process, such as the
commission, fees, costs, and other expenses unless both parties have agreed otherwise. The second
beneficiary cannot transfer the LC to any third beneficiary but can re-transfer the LC to the first beneficiary.
Fractions of a transferable LC can be transferred separately. However, the sum of the fractions of transfer
must not exceed the total amount of the credit. Also, there must be a mention of permission for partial
shipment in the LC.
In a non-transferable LC, the beneficiary cannot transfer the credit to another beneficiary. The beneficiary
may assign the proceeds they are entitled under the LC but do not have the right to perform under the LC.
FAQs on Transferable Letter of Credit (LC)
1. What does transferring bank in LC mean?
Transferring bank in LC is a nominated bank that transfers the credit. A transferring bank can also be a bank
authorized explicitly by the issuing bank to transfer the credit. An issuing bank can also be a transferring
bank.
A transferable LC can only be transferred to one or more second beneficiaries, but it cannot be transferred
further.
LCs are based on conditional commitments. The banks prepare them at the importers' request. The LC
guarantees that the importing party will pay the cost of goods to the exporter but only when the conditions
are met and the documents mentioned on the LC are delivered correctly. In other words, a transferable LC
itself is a confirmation that the payment will be made subject after the specific terms and conditions are
fulfilled. The issuing bank can confirm the authenticity of an LC.
LC discounting acts as financial security for the import or export businesses or both. This funding option can
be availed to fulfill financial requirements. It can be used, for instance, when the importer wants to extend
the payment term but the exporter insists on immediate payment or when the importer fails to pay on the due
date.
5. Is a transferable LC safe?
Yes, a transferable LC is safe and secure. The most significant advantage of using a transferrable LC is that
it guarantees the supplier that they will receive their dues. With a transferable LC, an importer or an exporter
can transact with their international trade partners securely without even knowing them in person.
A non-transferable LC is a document of credit that a beneficiary cannot assign, either partially or entirely, to
any other party. It is issued in favor of a particular beneficiary, which is usually the seller in trade deals. The
letter remains non-transferable to anyone other than the beneficiary for financial security and convenience.
In some cases, the seller may find it challenging to fulfill the terms of the LC and may request the buyer to
amend the LC due to the following reasons.
When problems arise so late in the trade process, the buyer's and seller's banks try to negotiate. This may
result in a delay in executing and completing the transaction. It is also important to note that if the
documents are not in line with the specifications of the LC, the buyer's issuing bank is not obliged to make
the payment. As most LCs are irrevocable, it may not be easy to make amendments at times.
The terms and the conditions mentioned in the original LC cannot be changed while transferring the LC.
A transferable LC can have a first beneficiary and one or more second beneficiaries.
A transferable standby LC is a legal document that guarantees a bank's payment commitment to a seller. The
guarantee stands even if the buyer defaults on the agreement due to some reasons or circumstances.
Sample Letter of Credit—SWIFT Format
*** HARDCOPY msg id 0131-00010-00333 ***
RECEIVED FROM:
IMPORTER’S COMMERCIAL BANK
T
AIPEI, TAIWAN
sent to :
SELLER’S U.S. COMMERCIAL BANK
INTERNATIONAL DIVISION
SAN FRANCISCO, CA
date : 07 july 95 time : 09.13 issue of a documentary credit **urgent**