What is a Transferable Letter of Credit?05 April 2023
What is a Transferable Letter of Credit?
A Transferable Letter of Credit (LC), also known as a Transferable Documentary Credit, is a type of letter of credit commonly used in international trade to facilitate transactions involving multiple parties. It allows the beneficiary (the seller or exporter) of the LC to transfer all or a portion of the credit to one or more secondary beneficiaries (intermediary sellers) who can, in turn, further transfer the credit to additional parties if needed. Transferable LCs are a useful financial tool when there is a complex supply chain involving multiple suppliers and intermediaries.
Here’s how a Transferable LC works:
- **Primary Beneficiary (Seller/Exporter): ** The primary beneficiary initiates the process by negotiating a letter of credit with the buyer (importer) and their bank (issuing bank). The letter of credit is issued in favour of the primary beneficiary, who is the initial recipient of the payment.
- **Transfer of Credit: ** The primary beneficiary, who may not be the actual manufacturer or supplier of the goods, can transfer all or a portion of the letter of credit to one or more secondary beneficiaries. This transfer is done by requesting their bank (the advising or confirming bank) to make the credit transferable.
- **Secondary Beneficiary (Intermediary Seller): ** The secondary beneficiary is typically a party involved in the supply chain who provides goods or services to the primary beneficiary. They receive a portion of the proceeds from the LC when the terms of the LC are met. The secondary beneficiary can also be located in a different country from the primary beneficiary.
- **Final Beneficiary (Manufacturer/Supplier): ** In some cases, a secondary beneficiary may further transfer the credit to another party, who may be the actual manufacturer or supplier of the goods or services.
Key points to note about Transferable LCs:
– The primary beneficiary retains control over the original letter of credit and can specify the terms and conditions under which they are willing to transfer the credit.
– Each beneficiary in the chain has their own obligations to fulfil under the terms of the LC, and the credit is transferred subject to the same terms and conditions as the original LC.
– The issuing bank may or may not be aware of the existence of secondary beneficiaries, as this depends on whether the LC is confirmed or unconfirmed. In a confirmed LC, the confirming bank confirms the transfer to secondary beneficiaries, while in an unconfirmed LC, the secondary beneficiary relies on the creditworthiness of the primary beneficiary.
Transferable LCs are valuable in scenarios where the primary beneficiary acts as a middleman or intermediary in the supply chain, allowing them to facilitate transactions and payments to multiple suppliers without having to rely on their own capital or credit. It provides flexibility in complex international trade transactions. However, it’s essential to have clear and well-defined terms and communication among all parties involved to ensure smooth execution.