Letters of Credit and Trade Finance

Transferable Letter of Credit Explained

What a transferable letter of credit is

A transferable LC is a documentary letter of credit that the issuing bank has expressly marked as "transferable". The original beneficiary, called the first beneficiary, can ask a bank, called the transferring bank, to make the credit available in whole or in part to one or more second beneficiaries.

An LC is only transferable if it says so. Words like "divisible" or "assignable" are not enough. Transfer is also not automatic: the transferring bank is not obliged to transfer except to the extent and in the manner it has expressly agreed.

Transferable LCs are mostly used in intermediated trade, including commodities. For general background see documentary letter of credit and trade finance instruments explained.

How transfer works under UCP practice

Under UCP 600, the ICC rules most LCs follow, a typical transfer runs as follows:

1. The end buyer's bank issues a transferable LC in favour of the intermediary.
2. The intermediary asks the nominated or transferring bank to transfer it to its supplier, paying the transfer fees.
3. The transferring bank issues the transferred LC to the supplier, with permitted changes to amount, price and dates.
4. The supplier ships and presents documents to the transferring bank.
5. The intermediary substitutes its own invoice, and draft if required, for the supplier's.
6. Documents go to the issuing bank, which pays.
7. The supplier receives its amount, and the intermediary receives the difference.

The process lets the intermediary avoid using its own credit lines for the purchase.

First beneficiary vs second beneficiary

First beneficiary (intermediary):- Controls whether and how much is transferred. - Can substitute invoices to protect its margin. - Usually pays transfer charges unless agreed otherwise. - Must supply substitute documents promptly when asked, or the bank may forward the supplier's documents as they are.

Second beneficiary (supplier):- Receives a credit backed by the issuing bank, on largely the same terms. - Presents its own shipping documents. - Cannot transfer the credit again to a third beneficiary. - May be able to see the end buyer's identity on documents unless the deal is structured carefully.

Limits, partial transfers, and what cannot be changed

Under UCP practice, the transferred LC must mirror the original except for certain elements, which may be reduced or shortened:

• The amount.
• The unit price.
• The expiry date.
• The period for presentation.
• The latest shipment date or given period for shipment.

The insurance percentage can be increased to give the required cover. The first beneficiary's name may replace the applicant's name.

Other points:

• Partial transfers to more than one second beneficiary are possible if partial drawings or shipments are allowed.
• A second beneficiary cannot retransfer to a third.
• Transfer back to the first beneficiary is not a further transfer.
• Documents still need to comply with the original LC. A discrepancy by the supplier can affect the whole chain.

Transferable LC vs back-to-back LC

Both serve intermediaries, but they work differently.

If the end buyer will not issue a transferable LC, or the supplier needs different terms, a back-to-back structure may fit better. See our back-to-back letter of credit services.

How to arrange a transferable LC for intermediary trade

1. Negotiate the sales contract so the buyer agrees to issue a transferable LC, and name the transferring bank if possible.
2. Align terms early with both buyer and supplier, especially dates, documents and price.
3. Check bank acceptance before relying on transfer, as banks can decline.
4. Prepare substitute documents in advance so you can swap invoices quickly.
5. Protect confidentiality by agreeing how documents name the parties.
6. Plan for discrepancies with a document checklist shared with the supplier.

Financely is a fee-based arranger and advisor, not a bank or lender. We do not issue or transfer LCs. We help intermediaries structure the contracts and LC wording, prepare the transfer request and approach banks willing to act. Fees pay for that work, not for an outcome. See trade finance advisory. Related guides: export letter of credit, confirmed letter of credit and commodity trade finance explained.

Frequently asked questions

What makes a letter of credit transferable?

It must be expressly stated as "transferable" by the issuing bank. Other words do not make it transferable.

Can a transferable LC be transferred more than once?

It can be transferred to several second beneficiaries in parts if partial shipments are allowed, but a second beneficiary cannot transfer it again.

Can the intermediary keep its margin confidential?

Partly. Substituting invoices hides the price difference. Party names need care in the document requirements.

Is a transferable LC better than a back-to-back LC?

Neither is always better. Transferable LCs use less of the intermediary's credit; back-to-back LCs allow more flexible terms.