GLOBAL SELLING BLOG

What is a Transferable Letter of Credit?

A Transferable Letter of Credit allows sellers to transfer payment rights to other beneficiaries. Learn more about how it works, application process and format in this blog.

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:

Step 1

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.

Step 2

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.

Step 3

After receiving the LC from the bank, the exporter will ship the goods to the exporter and submit essential documents to their respective bank.

Step 4

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.

Step 5

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.

Easy e-commerce exports with Amazon
Global Selling

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 is an e-commerce exports program that enables exporters and MSMEs to start and grow their export business in 200+ countries and territories. The exporter can simply register with the program in four simple steps and reach millions of customers shopping on 18+ Amazon international marketplaces.

Guide to export with Amazon

More blogs on Letter of Credit

1. Letter of Credit at Sight: Meaning, process and its benefits

2. What is a Letter of Credit?

3. Irrevocable Letter of Credit: Meaning, process and benefits

4. Green Clause Letter of Credit: Definition, example and features

5. Documentary Letter of Credit: Overview and working

6. Revocable Letter of Credit: Everything you need to know about its uses

7. Red Clause Letter of Credit: Meaning, example and types

8. Standby Letter of Credit (SBLC): Overview, process and types

9. Usance Letter of Credit: Overview, meaning and process

10. Revolving Letter of Credit: Overview, meaning and process

11. Back to Back Letter of Credit: Overview, meaning and process

Frequently Asked Questions

Is a Transferable LC safe?

Yes. A Transferable LC is secure and safe to use.

Where is Transferable LC used?

A Transferable LC is used in business agreements and international trades to guarantee payment to the exporter. It is an alternative option to advance payments.

How many times can a Transferable Letter of Credit be transferred?

A Transferable Letter of Credit can be transferred to one or more second beneficiaries.

Can a Transferable LC be confirmed?

A confirmed Letter of Credit offers double guarantee of payment to the exporter. A Transferable LC itself is a confirmation of payment after the fulfillment of mentioned terms and conditions. The issuing bank confirms the Transferable LC.

What are the types of LC?

Here are some of the types of LC:
• Irrevocable LC
• Revocable LC
• Stand-by LC
• Confirmed LC
• Unconfirmed LC
• Transferable LC
• Back-to-Back LC
• Payment at Sight LC
• Deferred Payment LC
• Red Clause LC

Published on October 31, 2022.

Sources:
1. https://www.thebalancemoney.com/Transferable -letter-of-credit-5210233
2. https://www.investopedia.com/terms/t/Transferable -letter-of-credit.asp
3. https://pdf4pro.com/fullscreen/sample-letter-of-credit-swift-format-4dd489.html
4. https://www.jrslm.com/Transferable%20&%20Non-transferable%20.html
5. https://www.ocbc.com/business-banking/smes/trade/transferable-letter-of-credit

Disclaimer: Whilst Amazon Seller Services Private Limited ("Amazon") has used reasonable endeavours in compiling the information provided, Amazon provides no assurance as to its accuracy, completeness or usefulness or that such information is error-free. In certain cases, the blog is provided by a third-party seller and is made available on an "as-is" basis. Amazon hereby disclaims any and all liability and assumes no responsibility whatsoever for consequences resulting from use of such information. Information provided may be changed or updated at any time, without any prior notice. You agree to use the information, at your own risk and expressly waive any and all claims, rights of action and/or remedies (under law or otherwise) that you may have against Amazon arising out of or in connection with the use of such information. Any copying, redistribution or republication of the information, or any portion thereof, without prior written consent of Amazon is strictly prohibited.

*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

What is an Importer of Record (IOR)?

Guide on how to export from India