Transferable Letter of Credit Guide
A transferable letter of credit allows an intermediary to use an incoming documentary credit to support payment to an underlying supplier without establishing a completely separate payment instrument. For trading companies, distributors and commodity intermediaries, it can connect the buyer's bank-backed payment obligation directly to the supply side of the transaction.
What Is a Transferable Letter of Credit?
A transferable letter of credit is a documentary letter of credit that expressly allows the first beneficiary to request that all or part of the credit be made available to another beneficiary.
The structure is commonly used where the beneficiary named in the buyer's LC is a trader or intermediary rather than the manufacturer, producer or supplier performing the underlying shipment.
Instead of requiring the intermediary to pay the supplier entirely from its own balance sheet, the incoming LC can form the payment framework for the supplier. The first beneficiary remains positioned between the buyer and supplier while the transferring bank handles the transfer.
How the Transaction Works
The commercial chain remains buyer → intermediary → supplier, while the documentary credit connects the corresponding banking obligations.
Buyer Places Order
The applicant contracts with the intermediary for the goods.
LC Is Issued
The buyer's bank issues a transferable LC in favor of the intermediary.
LC Is Transferred
The first beneficiary requests transfer to the underlying supplier.
Supplier Ships
The second beneficiary performs and presents the required documents.
Documents & Payment
Documents move through the banking chain and payment follows a complying presentation.
UCP 600 Article 38
Transferable credits issued subject to UCP 600 are principally governed by Article 38. Several provisions directly affect how the transaction can be structured.
The LC must state that it is transferable
Transferability should be built into the credit at issuance. It is not created simply because the first beneficiary asks for it later.
The transferring bank must agree
A bank is not automatically obligated to transfer the credit. The bank must accept the role and the requested transfer.
More than one supplier can be supported
Where partial drawings or shipments are permitted, portions of the credit can be transferred to multiple second beneficiaries.
The second beneficiary cannot transfer it onward
A transferred credit cannot normally be transferred by the second beneficiary to a subsequent beneficiary.
What Can Change When the LC Is Transferred?
The transferred credit largely follows the master LC, but UCP 600 permits several commercial terms to be reduced or adjusted when the credit is transferred.
| Term | Transfer Treatment | Commercial Purpose |
|---|---|---|
| Credit Amount | May be reduced | Allows the intermediary to retain its trading margin. |
| Unit Price | May be reduced | Reflects the supplier price rather than the intermediary's sale price. |
| Expiry Date | May be shortened | Leaves time for document substitution and onward presentation. |
| Presentation Period | May be shortened | Provides the first beneficiary and transferring bank with additional execution time. |
| Latest Shipment Date | May be brought forward | Creates a buffer before the corresponding master LC deadline. |
| Insurance Percentage | May be increased where required | Preserves the required insurance coverage against the master credit value. |
How the Intermediary's Margin Is Preserved
One of the central commercial features of a transferable LC is the first beneficiary's ability to substitute its own invoice for the supplier's invoice before presentation under the master credit.
Master LC
Buyer opens a transferable documentary LC for $5 million in favor of the trading company.
Transferred Amount
The trader transfers $4.65 million to the underlying supplier, leaving a $350,000 gross trading spread before bank charges and other transaction costs.
Following the supplier's presentation, the first beneficiary can substitute its own invoice within the parameters of the credit. This is one reason transferable structures are particularly relevant to commodity merchants and other intermediaries operating without taking the full transaction value onto their balance sheet.
Where Transferable LCs Are Used
The structure is most useful where the party holding the customer relationship is not the party producing or directly supplying the goods.
Commodity Trading
Traders purchasing agricultural products, metals, fuels or other commodities from underlying suppliers.
Equipment Distribution
Distributors sourcing machinery or industrial equipment from manufacturers for resale to an end buyer.
Multi-Supplier Procurement
Transactions where one buyer order is fulfilled through several eligible suppliers.
International Trading Houses
Trading companies managing sourcing, logistics and commercial execution between buyer and producer.
Large Purchase Orders
Intermediaries that have secured a buyer but require the incoming LC to support supplier performance.
Cross-Border Supply Chains
Transactions involving a buyer, intermediary and supplier operating across different jurisdictions.
Transferable LC vs. Back-to-Back LC
Both structures can support intermediary trade, but the banking mechanics are materially different. Financely also structures back-to-back letters of credit > where a transferable structure is not suitable.
| Area | Transferable LC | Back-to-Back LC |
|---|---|---|
| Number of Credits | One master LC that is transferred. | Two separate documentary credits. |
| Supplier Position | Supplier becomes second beneficiary under the transferred credit. | Supplier is beneficiary of a separate secondary LC. |
| Bank Exposure | Transfer occurs within the existing LC framework. | Bank issues a new obligation under the secondary LC. |
| Transferable Wording | Required in the master LC. | Not required for the master credit itself. |
| Structuring Flexibility | Bound more closely to the master LC terms. | Secondary LC can provide additional structuring flexibility, subject to bank approval. |
| Typical Use | Direct buyer → intermediary → supplier transaction. | Transactions requiring a separate supplier-facing banking obligation. |
For a deeper comparison, see transferable letters of credit vs. back-to-back letters of credit.
What We Need to Structure the Transaction
We underwrite the commercial transaction before determining the appropriate bank placement strategy.
How Financely Executes the Mandate
We handle the structure as an execution mandate rather than simply providing an introduction to a bank.
Transaction
We review the buyer, supplier, contracts, economics and proposed payment flow.
Bankability
We assess the applicant, issuing route, transaction risks and available credit support.
Instrument
We define the transferable LC terms and any confirmation or financing requirements.
Bank Execution
We coordinate institutional outreach, underwriting and execution through issuance.
Where the transaction requires a broader facility rather than a single instrument, we can also structure the wider trade finance facility around the purchase and sale cycle.
Confirmation and Financing
Transferability solves the beneficiary structure. It does not automatically solve issuing-bank risk, country exposure or liquidity requirements.
Where the supplier requires additional bank risk mitigation, Financely can assess letter of credit confirmation as part of the transaction. Where payment tenor is required, the transaction may instead incorporate usance, discounting or UPAS financing depending on the commercial objective and institutional appetite.
Need a Transferable Letter of Credit?
Submit the buyer contract, supplier terms, transaction amount and required LC structure. Financely will review the mandate, structure the transaction and determine the appropriate institutional placement route.
Request a QuoteTransferable Letter of Credit FAQ
Yes. Under UCP 600 Article 38, the credit must specifically state that it is transferable for it to operate as a transferable credit.
Yes. A transferable credit may generally be transferred in whole or in part subject to its terms and the transferring bank's acceptance.
Potentially. Where the master credit permits partial drawings or shipments, portions may be transferred to more than one second beneficiary.
Generally no. Under Article 38, the transferred credit cannot be transferred at the request of the second beneficiary to a subsequent beneficiary.
The structure can allow the first beneficiary to transfer the credit at a lower amount or unit price and substitute its own invoice before presentation under the master credit. The documentary structure must be drafted carefully around the underlying transaction.
Depending on the transaction, alternatives can include amendment of the master credit, a back-to-back letter of credit, supplier finance or another structured trade finance arrangement.
No. Assignment of proceeds concerns the right to receive proceeds. Transferability concerns making the documentary credit available to a second beneficiary.
Financely can review, underwrite and structure the transaction and coordinate placement with suitable institutions. Final issuance and transfer remain subject to the relevant banks' underwriting, KYC, compliance and credit approval.
