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Trade Finance | Letters Of Credit
Intermediaries sit in the middle of real trade flows every day. They secure a buyer, then place the purchase with a supplier. The problem is simple: the supplier wants bank-secured payment, and the intermediary often does not want to disclose the supplier or lose control of the transaction.
Two structures show up constantly in this situation: transferable letters of credit and back to back letters of credit. They sound similar. They behave very differently in bank operations, risk allocation, and timing. This post explains how each works, when each fits, and the checklist that prevents avoidable document failures.
Start here. If the team is not aligned on definitions, the deal will drift into amendments and discrepancy risk.
| Term | Definition |
|---|---|
| Transferable Letter Of Credit | A documentary letter of credit that the issuing bank has expressly stated is transferable, allowing the first beneficiary to transfer drawing rights to one or more second beneficiaries. |
| First Beneficiary | The intermediary or trader named as beneficiary in the original letter of credit issued by the buyer’s bank. |
| Second Beneficiary | The supplier (or suppliers) who receive the transferred credit and present documents to get paid under the transferred terms. |
| Back To Back Letters Of Credit | A structure with two separate letters of credit: the buyer’s LC in favour of the intermediary, and a second LC issued by the intermediary’s bank in favour of the supplier, typically relying on the first LC as support. |
| Advising Bank | The bank that authenticates and advises an LC to the beneficiary. In transferable credits, it may also act as the transferring bank. |
| Confirming Bank | A bank that adds its own payment undertaking to the LC, taking issuing bank risk subject to compliant presentation. |
| Discrepancy | Any mismatch between the documents presented and the LC terms. Discrepancies can delay payment or lead to refusal. |
Transferable LC:
one LC, with transfer mechanics inside the same credit.
Back To Back LC:
two LCs, issued by two banks, with the intermediary’s bank taking separate risk on the intermediary.
In a transferable structure, the buyer’s bank issues a documentary letter of credit naming the intermediary as the beneficiary. The credit must state that it is transferable. If it does not, it is not transferable in bank operations, even if parties want it to be.
The intermediary then asks the transferring bank to transfer the LC, in whole or in part, to the supplier as second beneficiary. The supplier ships, prepares documents, and presents under the transferred LC. The intermediary often retains the right to substitute its own invoice and draft for the supplier’s invoice and draft, so the intermediary keeps its margin confidential.
Transfer terms are not a free-for-all. Banks follow transfer rules to protect the issuing bank’s undertaking. In practice, transferred credits often reduce amount, unit price, and sometimes tighten dates to leave room for the intermediary to substitute documents and re-present. That timing buffer is not a luxury. It is the difference between a clean draw and a scramble.
In a back to back structure, the buyer’s bank issues the master LC in favour of the intermediary. The intermediary then approaches its own bank to issue a second LC in favour of the supplier. That second LC is a separate instrument with its own issuance fees, document examination, and bank risk position.
The intermediary’s bank is not simply “passing through” the buyer’s LC. It is issuing its own undertaking to the supplier. That means the intermediary’s bank underwrites the intermediary, and it also underwrites the practical execution risk that the master LC will pay as expected. Many banks will require cash margin or additional security, especially if the master LC is issued by a bank they do not like, or in a jurisdiction they limit.
This is the decision framework. If you answer these items cleanly, you will usually pick the correct structure before you waste time on bank back-and-forth.
| Decision Point | What It Means For Your Choice |
|---|---|
| Is the buyer LC expressly transferable? | If no, a transferable structure is off the table. Back to back becomes the common workaround. |
| Do you need to change more than price and amount? | If you need different documents, different shipment terms, or different presentation mechanics, back to back often fits better. |
| Will the supplier accept a transferred LC? | Some suppliers only accept an LC issued directly by a specific bank or confirmed by a specific bank. That pushes you toward back to back or confirmation. |
| Can the second beneficiary pass KYC, AML, and sanctions checks? | If the supplier cannot pass bank onboarding, neither structure will close cleanly. Fix onboarding first or change counterparties. |
| Do you need multiple suppliers? | Transferable credits can support partial transfers to multiple second beneficiaries if the credit allows partial shipments and the bank accepts the workflow. |
| Do you need margin confidentiality? | Transferable credits often allow invoice substitution by the first beneficiary. Back to back can also protect margin, but with more moving parts. |
| How much control does your bank require? | Back to back LCs frequently require margin or collateral from the intermediary. Transfer can be operationally lighter if the issuing bank is acceptable and the credit is properly drafted. |
| How tight is the timing? | Back to back needs careful date stacking so the supplier presents early enough for the intermediary to present to the buyer’s bank. Transfer also needs buffer for substitution and re-presentation. |
Many LC deals fail because dates are written without operational reality. You need enough time between shipment, document preparation, presentation, bank examination, and re-presentation. In back to back deals, the second LC should usually expire earlier than the master LC, and shipment dates should be earlier too. That buffer is what protects the intermediary from being trapped between two banks.
The buyer may require document conditions that the supplier cannot produce, or produces in a different format. Examples include inspection certificates, beneficiary certificates, phrasing requirements, and third-party documents tied to specific counterparties. Solve this before issuance. After issuance, fixes mean amendments, and amendments mean time and fee leakage.
“Soft clauses” are conditions that are subjective or depend on a party’s discretion, such as “documents acceptable to applicant.” They tend to create disputes and delay payment. If a structure relies on predictable bank payment, soft clauses should be treated as high-risk and re-drafted.
Suppliers often care less about the buyer and more about the issuing bank. If the issuing bank is in a jurisdiction with transfer or FX issues, the supplier may demand confirmation or refuse the credit. This is also a common driver of back to back issuance through a bank the supplier trusts.
KYC and AML are not administrative noise. In both structures, banks must be comfortable with the involved parties, ownership, jurisdictions, goods, routes, and payment flows. If you cannot provide clean corporate documents and beneficial ownership disclosure quickly, you lose momentum.
Simple rule: You do not “fix compliance later” in trade finance. Compliance is part of the credit decision.
Financely supports trade finance structuring and issuer routing for documentary credits, including transferable and back to back structures. We focus on making the transaction executable in bank operations by tightening the document logic, aligning timelines, and matching the transaction to banks whose mandates fit the goods, routes, and counterparties.
For process visibility, start at How It Works. If you want to submit a transaction for structuring and issuer routing, use Contact Us.
Send the draft sales contract, the supplier proforma, and the buyer’s requested LC terms. We will revert with a structure recommendation, a date stack, and issuer routing options based on your transaction profile.
No. A credit must expressly state it is transferable. If it does not, banks treat it as non-transferable in operations.
In standard bank practice, transfer is generally a one-time transfer by the first beneficiary to one or more second beneficiaries. If you need multiple tiers of intermediaries, structure and bank policy must be assessed upfront.
Not always, but many banks require margin or collateral because the second LC is a separate undertaking by the intermediary’s bank. The amount depends on the intermediary’s credit, the issuing bank on the master LC, and the transaction risk profile.
Transferable structures can be cheaper because there is one LC, though there are transfer fees. Back to back structures often cost more because there are two separate LCs and more operational work. The cheaper structure is the one that pays cleanly without amendments and discrepancies.
This page is for general information only and does not constitute legal, tax, investment, or regulatory advice. Financely is not a bank and does not issue letters of credit. Any structuring support, introductions, and execution coordination are subject to diligence, KYC, AML, sanctions screening, bank criteria, and definitive documentation.
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