How Transferable Letters of Credit Work and When to Use Them
How Transferable Letters of Credit Work and When to Use Them
What Is a Transferable Letter of Credit
A transferable LC is an instrument that the issuing bank designates as transferable under Article 38 of UCP 600. This enables the first beneficiary to transfer drawing rights to one or more second beneficiaries. The LC can be transferred once only, but it can be split among multiple suppliers. Core terms like amount, expiry, and shipment dates may be reduced but not increased.
When To Use a Transferable LC
- When an intermediary arranges supply but does not manufacture or produce directly.
- When the buyer demands an LC, but the first beneficiary relies on subcontracted suppliers to deliver.
- When multiple suppliers need to be paid from one master LC, without issuing separate instruments.
- When confidentiality of the buyer relationship is less important than reducing issuance costs.
How Transfers Differ From Other LC Structures
A separate LC is issued to the supplier using the master LC as collateral. Useful when the incoming LC is not transferable. Creates two linked but distinct obligations.
The first beneficiary assigns proceeds under the LC to a supplier or financier. Unlike a transfer, obligations remain with the first beneficiary, who must present compliant documents.
Usually a guarantee of payment under ISP98 or UCP 600. Transfers are rare unless explicitly permitted. More often, assignments or back-to-back arrangements are used instead.
Allows suppliers to draw advances before shipment. Not a transfer, but often combined with assignments to provide liquidity to upstream suppliers.
Comparing Transferable LC Options
Key Considerations Before Using Transferable LCs
- Confirm transferability at issuance stage with the issuing bank.
- Check whether one transfer is sufficient or whether a back-to-back structure is needed.
- Consider assignment of proceeds if only payment rights (not obligations) need to shift.
- Ensure trade credit insurance matches the transfer or assignment structure.
- Seek legal opinions on enforceability in both jurisdictions involved.
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Financely advises on transferable, back-to-back, assignment, and standby LC structures for import export clients. Share your transaction details and we will provide a structuring path with investor and bank placement.
Start Client IntakeFinancely provides advisory, underwriting, and arrangement services through regulated partners. Financely is not a bank and does not issue LCs or make loans. Transferability is subject to issuing bank approval, UCP 600 or ISP98 rules, and legal enforceability. This article is informational only and does not constitute legal advice.
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