A transferable letter of credit (LC) is a bank-issued payment guarantee that expressly permits the primary beneficiary (the seller who receives the LC) to transfer all or part of the credit to one or more other parties (secondary beneficiaries, typically suppliers or manufacturers). It’s commonly used when the seller is acting as an intermediary — for example, a trader or reseller who needs to pass payment security to its upstream supplier without requiring an advance cash payment from the reseller.
Key takeaways
– A transferable LC allows the first beneficiary to assign some or all of the bank’s payment commitment to secondary beneficiaries.
– Transferability exists only if the LC expressly states it is “transferable.”
– Transferable LCs help intermediaries (middlemen) secure downstream suppliers while keeping the buyer’s bank relationship simple.
– Fees typically range from roughly 0.75% to 2% of the LC amount, but other charges (advice, amendment, confirmation, negotiation) may apply.
– Transferable LCs are distinct from back-to-back and confirmed LCs; each structure has different risks and operational mechanics.
How a transferable letter of credit works (simple example)
1. Buyer applies to its bank (issuing bank) for an LC in favor of Seller A (the first beneficiary). The LC explicitly states it is transferable.
2. Seller A needs to pay Supplier B to fulfill the order. Seller A asks the issuing bank (or the advising bank if so instructed) to transfer part (or all) of the LC to Supplier B.
3. The bank performs the transfer according to the LC’s terms and typically issues an amended LC naming Supplier B as the secondary beneficiary for the agreed portion.
4. Supplier B ships the goods and presents documents required by the LC to its bank and is paid under the LC terms. Seller A receives the remainder (if any) or is reimbursed after fulfilling its obligations.
Key legal/operational points
– Transferability must be expressly permitted in the LC wording. If the LC is silent or states “not transferable,” the transfer is prohibited.
– Partial transfers are allowed only when the LC permits them; the LC must specify whether partial transfers are acceptable.
– Transfers are subject to the terms of the LC and any applicable rules (e.g., ICC’s UCP 600) and to the policies of the banks involved.
– The first beneficiary cannot alter the terms of the LC when transferring — only the identity of the beneficiary and the amount (if partial transfer allowed) can change, and then only within the LC’s constraints.
Why parties use transferable LCs
– Intermediaries: Resellers can rely on a buyer’s LC to guarantee payment to their suppliers without tying up cash.
– Simplifies buyer’s banking: The buyer uses one issuing bank rather than issuing multiple LCs or arranging confirmations with several banks.
– Supply chain assurance: Suppliers get the comfort of bank payment upon complying with the LC’s documentary terms.
How to obtain a transferable letter of credit — practical steps (for buyers/applicants)
1. Decide LC requirements in your sales/purchase contract:
• State that the LC must be “transferable” (and whether partial transfers are allowed).
• Specify amount, currency, shipment terms, latest shipment date, required documents, and any expiry place.
2. Choose an issuing bank (preferably one acceptable to the seller). Confirm the bank’s capacity to issue transferable LCs.
3. Submit a formal LC application to the bank with credit and transaction information (buyer’s underwriting documents).
4. Negotiate and approve any bank fees and collateral or security the issuing bank requires.
5. Review the draft LC carefully before issuance to ensure it includes the transferability clause and precise documentary conditions — this reduces discrepancy risk.
6. After issuance, advise the seller to confirm they received the LC as drafted (and that it’s marked transferable).
Practical steps for the first beneficiary (seller/intermediary)
1. Confirm the LC is transferable and whether partial transfers are permitted and under what terms.
2. Decide how much to transfer to your supplier(s) and prepare a transfer request to the issuing or advising bank. Include full details of the secondary beneficiary and the precise amount(s).
3. Obtain any required authorizations or documentation the bank needs to effect the transfer.
4. Verify transfer instructions issued by the bank (amounts, new beneficiary name) and communicate this to the secondary beneficiary.
5. Monitor document flow: ensure the supplier provides documents that comply with the LC terms (the first beneficiary remains responsible for ensuring documentary compliance where applicable).
Practical steps for the secondary beneficiary (supplier)
1. Verify the transferred LC precisely (amount, expiry, documents required) and confirm acceptance with the transferring/advising bank.
2. Confirm whether the bank will confirm or negotiate documents for the transferred portion if you require additional comfort.
3. Ship goods and present the required documents to the negotiating/paying bank exactly as the LC demands.
4. Keep records of the transfer instrument and any correspondence with the banks.
Documents commonly required under LCs
(Documentation varies by transaction and LC terms. Common items include:)
– Commercial invoice
– Bill of lading or airway bill (as evidence of shipment)
– Packing list
– Insurance certificate/policy (if required)
– Certificate of origin (if required or for customs)
– Inspection/quality certificates (if specified)
– Any other document specified in the LC (e.g., phytosanitary certificates)
Comparisons with related LC types
– Transferable LC vs. Confirmed LC: A confirmed LC has a second bank (confirming bank) add its guarantee to the issuing bank’s commitment, protecting the seller against the issuing bank’s failure. Transferable LCs let the first beneficiary pass payment rights to others but do not, by themselves, add a second-bank guarantee. A buyer using a transferable LC typically deals with only the issuing bank.
– Back-to-back LC: Two separate LCs are issued for the same transaction — the buyer’s LC in favor of the intermediary and a separate LC issued by the intermediary (backed by the first LC) in favor of the supplier. This is different from a transfer because two distinct LCs exist.
– Revolving LC: Designed for repeated shipments/transactions — the credit amount revoles up to a limit and can be used multiple times without issuing a fresh LC each time.
– Commercial LC vs. Standby LC: A commercial LC is used to effect payment when documentary conditions are met. A standby LC is a contingency guarantee the bank pays only if the buyer defaults.
Costs and fees
– Banks typically charge a percentage of the LC amount — many market sources show something like 0.75%–2% annually of the LC amount, depending on applicant creditworthiness and the bank’s risk.
– Additional fees may include advising fees, confirmation fees (if a confirming bank is used), negotiation/acceptance fees, amendment fees, payment/settlement fees, and reimbursement/interest charges if funds are advanced.
– Fees vary considerably by bank, jurisdiction, transaction complexity, and whether confirmation is required. Always get a full fee quote before proceeding.
Risks and mitigations
– Documentary discrepancies: Banks pay only on presentation of documents that strictly comply with LC terms. Mitigation: draft clear, achievable documentary requirements; use pre-shipment checks.
– Bank credit risk: The paying bank may default. Mitigation: request confirmation from a bank acceptable to the beneficiary.
– Transfer restrictions/frauds: Transfers can be limited by LC wording or bank policies; fraudulent documents or misrepresentations are a risk. Mitigation: perform due diligence on counterparties, insist on verified documents or inspections, consider documentary collection or insurance.
– Currency and political risk: Especially in international trade. Mitigation: lock exchange rates, use banks with strong international presence, consider export credit insurance.
When to use a transferable LC vs alternatives
– Use transferable LC when an intermediary must guarantee payment to upstream suppliers and you want to avoid issuing separate LCs or providing cash upfront.
– Use a confirmed LC when beneficiaries need additional assurance because the issuing bank is unknown or perceived as risky.
– Consider back-to-back LCs when the intermediary needs to retain different sets of obligations with buyer and supplier (but be aware this doubles document handling and may require collateral).
Bottom line
A transferable letter of credit is a flexible trade finance tool that enables a primary beneficiary to pass all or part of a bank payment commitment to secondary beneficiaries — commonly used by intermediaries who must ensure suppliers are paid without making advance cash outlays. Transferability must be expressly stated in the LC and is subject to the LC’s terms and the banks’ policies. Parties should carefully draft LC wording, understand documentary requirements, obtain clear quotes for fees, and perform due diligence on all counterparties and banks involved.
Sources and further reading
– Investopedia. “Transferable Letter of Credit.”
– Export-Import Bank of the United States. “How Does a Letter of Credit Work and What Is It?” (overview of LCs)
– U.S. Department of Commerce, International Trade Administration. “Trade Finance Guide: A Quick Reference for U.S. Exporters.” (practical guidance on documents and trade finance instruments)
– Cornell Law School Legal Information Institute. “Credit Facility.” (definition of credit facilities)
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.