Payment terms and financial guarantees between parties impact day-to-day import export trade. Often, importers use Letter of Credit as a payment method – a document issued by a bank that guarantees that the exporter will receive payment from the importer on time for the full or remaining amount. Among the many types of LCs, Transferable LC is an important one.
What is a Transferable Letter of Credit?
As the name suggests, a Transferable Letter of Credit
allows the first beneficiary with standby bank assurance to transfer the payment rights to other beneficiaries. With this letter, the original beneficiary can transfer the payment rights to third parties requiring payment assurance. This financial guarantee usually applies to agents and dealers and not manufacturers and suppliers. That way, sellers get the authority to request the bank to avail the credit entirely or in chunks to other beneficiaries1
Why is a Transferable Letter of Credit required?
Most trade transactions consist of a beneficiary who has acquired a Letter of Credit but has a pending sale and cannot fulfill the goods order from an open account. The Transferable Letter of Credit allows trade brokers to leverage importer’s credit to transfer the portion of the export Letter of Credit to the manufacturer. The manufacturer only gets the assurance of payment if they successfully comply with all the terms and conditions of the Transferable Letter of Credit.
How does a Transferable Letter of Credit work?
A bank or a financial organization issues a Transferable LC to the applicant. The issuing bank specifically designates the Transferable Letter of Credit based on individual cases and applicants. The bank offers the LC to one beneficiary and that beneficiary can transfer the rights to another entity, who becomes the secondary beneficiary.
Post receiving the LC from the primary beneficiary, the secondary beneficiary gets the same right as the primary and also receives a right to request the bank to transfer a part or entire Letter of Credit to other beneficiaries. The secondary beneficiary uses the Transferable LC to purchase the goods.
How to apply for a Transferable Letter of Credit?
Suppose you are sourcing products from a company based in a different country. The company agrees to accept a Transferable LC to guarantee the payment. That way, the importer does not have to make the payment right away and gets a time period for the same. Here is a step-by-step procedure to obtain a Transferable LC2:
The exporter and the issuing bank must be confident about the importer’s creditworthiness. If the issuing bank verifies the creditworthiness of the importer, it will ask for a sales agreement. After that, the importer can apply for a Transferable Letter of Credit from the issuing bank.
The issuing bank of the importer drafts a Letter of Credit according to the terms and conditions mentioned in the sales agreement. The exporter’s then bank reviews, approves and forwards it to the exporter.
After receiving the LC from the bank, the exporter will ship the goods
to the exporter and submit essential documents to their respective bank.
The exporter’s bank will review the documents submitted and check whether it is consistent with the terms and conditions outlined in the Letter of Credit. If there are any discrepancies or issues, the documents will need to be resubmitted after fixing the errors and discrepancies. Once the exporter’s bank approves the documents, they can be forwarded to the importer’s bank.
In the final stage, the importer’s bank will release the payment to the exporter’s bank and provide documents to receive and claim imported goods.
Difference between a Transferable Letter of Credit and Non-transferable Letter of Credit
There are different kinds of letters of credit that guarantee financial payment under different circumstances. Here are some differences between Transferable LC and Non-transferable LC4:
A Transferable Letter of Credit allows the original beneficiary to request the issuing bank to make the requested credit available fully or in parts to other beneficiaries. An export manufacturer or export-trader can be the second beneficiary. The applicant must insist on making the LC transferable, so the issuing bank designates a Transferable LC. The LC transferred to the secondary beneficiary is called transferred credit and the bank that makes the transfer is called a transferring bank.
On the contrary, the Non-transferable LC does not allow transferring the Letter of Credit to other beneficiaries. This Letter of Credit explicitly mentions the terms ‘non-transferable’ or ‘not transferable’. If there are no such mentions, it cannot be a Non-transferable LC. Additionally, the beneficiary of the Non-transferable LC can assign any proceeds entitled under the LC but cannot transfer the rights to perform under the agreement.
Acquiring the Transferable LC enables the importer to guarantee the exporter the payment and receive the shipments on time. With e-commerce exports, reaching international customers and receiving payments is easy and simple. Amazon Global Selling not just enables you to sell across 200+ countries and territories but also receive payments directly to your bank in INR or other currency of your choice.
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With the growing demand for Indian products in international marketplaces
, exporters and Indian sellers are keen to expand their businesses to the world. Amazon Global Selling
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Published on October 31, 2022.
1. https://www.thebalancemoney.com/Transferable -letter-of-credit-5210233
2. https://www.investopedia.com/terms/t/Transferable -letter-of-credit.asp
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