Frugal Living

What Does ‘Transferable Letter of Credit’ Mean?

A transferable letter of credit is an essential tool in business used to facilitate payments to the manufacturer or supplier. According to financial experts, it is a substitute for a confirmed letter of credit or advanced payments. It can also be defined as a letter of credit that allows the initial beneficiary to transfer part or all of the credit to another person. This forms the secondary beneficiary. Furthermore, the person that first accepts the transferable letter of credit from the lender is called the first beneficiary.

How It Works

A transferable letter of credit is comprised of a transferable provision. Before finalizing a client’s order, sellers need a letter of credit. A letter of credit is a letter from the bank assuring that a correct amount will be paid to the seller and that the payments will be made on time. If a seller requires one, the buyer must collaborate with the bank for a letter of credit approval.

For a transferable letter of credit, the bank will provide provisions for transferring the extension of credit to the second beneficiary.If a loan is required at the time of payment, the second beneficiary will receive the rights to the amount. Nonetheless, the first beneficiary will be liable for the payment of the loan if the bank releases it.

Parties involved in the transferable letter of credit include the applicant, the first beneficiary, and the second beneficiary.

Rules That Govern Transferable Letters Of Credit

Transferable letters of credit are controlled by Article 48 of the Uniform Customs and Practice for Documentary Credits (UCP 600). This article cites that banks are under no obligation to transfer credit except to the extent and in the manner expressly consented to.Moreover, the bank involved in the transfer must be named explicitly in the transferable letter of credit as the bank authorized to facilitate the transfer.

According to Boostcredit101, banks have the right to decline a transferable letter of credit. Moreover, if the terms and conditions of the transferable letter of credit are amended, it must be agreed to by all parties involved.

Here are some of the things that can be changed in a transferable letter of credit;

  •         The amount involved can be reduced.
  •         Unit prices may be reduced.
  •         The expiry and latest shipping dates may be reduced.
  •         If an insurance document is needed, the coverage may be increased to provide coverage by the original credit transferable letter.
  •         The place of payment or negotiation can be changed to the location of the transferee.


Experts cite that a transferable letter of credit is more convenient compared to a confirmed letter of credit because the buyer is only required to deal with one bank.A confirmed letter of credit requires the buyer to obtain two letters of credit to confirm the first letter of credit. These letters are collected from different banks and the second bank requires a letter from the first bank.

The seller always requires a confirmed letter of credit in case the first institution defaults on repayment.

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