What is a 'Transferable Letter of Credit'

A transferable letter of credit is a letter of credit that permits the initial beneficiary of the credit to make some or all of the credit transferable to another party, thereby creating a secondary beneficiary. The party that initially accepts the transferable letter of credit from the bank is referred to as the first beneficiary.

BREAKING DOWN 'Transferable Letter of Credit'

A transferable letter of credit is often used in business deals to ensure payment to the supplier or manufacturer. A transferable letter of credit is an alternative option to advance payments or a confirmed letter of credit.

Transferable Letter of Credit Structuring

A transferable letter of credit is a letter of credit which includes a transferable provision. Sellers of manufactured goods will often require a letter of credit before proceeding with a customer’s order. If a seller requires a letter of credit the buyer must partner with a bank for letter of credit approval.

The letter of credit approval process is similar to the process for receiving a bank loan. The buyer must submit a letter of credit application including details on their credit profile. A bank will analyze a buyer’s credit score and financial stability in the underwriting process. If approved, the letter of credit shows that the bank is willing to issue a loan for a specified amount to the borrower if a loan is needed by the buyer to cover the payment of the customer’s order with the seller.

In a transferable letter of credit, the bank will include provisions for transferring the extension of credit to a secondary beneficiary. In a transferable letter of credit the secondary beneficiary is usually the seller who receives rights to the payment if a loan is needed at the time of payment.

The transfer of credit can include all or part of the total amount of credit that the buyer has been approved for. A transferable letter of credit allows for payment to be transferred directly to the secondary beneficiary however the first beneficiary is still liable for payments on the loan if it is disbursed by the bank.

A transferable letter of credit can be a more convenient option for a buyer than a confirmed letter of credit. In a confirmed letter of credit the buyer must obtain two letters of credit to make the first letter of credit confirmed. In a transferable letter of credit, the buyer is only required to deal with one bank.

Trade Agreements

A transferable letter of credit is a type of credit support that can be used in both domestic and international trade agreements. For example assume a buyer has contracted with a seller for $45,000 worth of goods. The seller states in the deal terms that they specifically require a transferable letter of credit before proceeding with the production. A buyer would need to partner with a bank to obtain approval for a $45,000 letter of credit with a transferable provision allowing payout to the seller as a secondary beneficiary. If the bank agrees to a $45,000 transferable provision than the original beneficiary can request a $45,000 payment from the bank directly to the seller at the time of sale.

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