What is a Transferable Letter of Credit?
A transferable letter of credit is a letter where the persons specified in the credit has the option to tell his/her bank to have the credit fully or in part sent to another. Where a letter of credit can be sent it is expressly tagged as “transferable” by the issuing bank. This type of letter of credit allows intermediaries (first beneficiaries) to offer security in the form of a letter of credit to their suppliers who are known as (second beneficiaries).
Transferable LC is used more in the Far East (China, Japan, Korea, Singapore, Taiwan, etc.)
How Does a Transferable Letter of Credit Work?
It happens mostly in a case where the middlemen do not have the capital to purchase the goods from their sources before they re-sell them to their final customers (applicants).
If the final buyers find it okay to work with a middleman, then he can let the middleman benefit from his credibility through a transferable letter of credit.
The middleman will have the part or all of the letter of credit given to his supplier, who has gained payment proof to ship the goods.
The supplier, on the other hand, can get its payment in exchange for the documents stated in the letter of credit.
The middleman has the right to change its own invoice for the one that is laid down by the supplier and collect the difference as his profit.
Non-Transferable Letter of Credit
In a non-transferable letter of credit, the bank refuses to allow the transfer of credit to non-other than the first beneficiary. So, it cannot be given to any party, and only the parties there can claim the credit for it.
What Criteria Apply to Transfers?
The transfer of letters of credit is backed by Article 48 of the Uniform Customs and Practice for Documentary Credits (UCP 600). It states that banks are under no law to transfer credit. Unless to the extent and terms agreed upon. Also, the transferring bank must be named. In the letter of credit as the bank approve to effect the transfer.
Criteria differ from one bank to another, it may include:
- The transferor must be a customer of the bank.
- “Negotiation” of the credit is only to the transferring bank.
- The issuing bank is a correspondent of the transferring bank.
- All terms of the credit being adhered to by the transferring bank.
What Can Be Changed:
Article 48 of the UCP 600 limits changes to the:
- The L/C amount may be reduced
- Unit prices may be reduced
- The expiry and current shipping dates may be curtailed
- The time period after the date of shipment to show documents to the bank may be restricted.
- The name of the beneficiary can be changed for the name of the buyer. However, if the buyer’s name is to be stated in any document other than the invoice. This must be strictly followed.
- Where an insurance document is needed, the coverage may be raised to offer coverage as needed by the original L/C.
- The place of the payment can be changed to the location of the transfer.
Benefits to Exporter (Seller)
- The seller can have sales on a larger scale. This is because the security offered by the Import Credit may be given to the actual supplier(s) or other parties to the transaction that will receive payment.
- You can source goods and services from suppliers using one credit line.
- Ability to retain control over the entire deal as all parties follow the same terms and conditions with only a few changes.
- Firstly, Irrevocable Credit Application Form
- Secondly, Original Transferable Export LC
- Cover Letter with Company Letterhead
- Sales Contract
- Lastly, Import/export license by the Ministry of Commerce (both original and copy).