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How a letter of credit works

how a letter of credit works


What is a transferable Letter of Credit?

A transferable letter of credit is one, which specifically states that it is

transferable. This will only occur if the applicant for the letter of credit

(buyer) agrees. In a transferable letter of credit, the rights and

obligations of the beneficiary are transferred to another party, usually a

manufacturer or wholesaler. Transfer may be either full or partial.

Why transfer an L/C?

Most transfers involve a seller who, as beneficiary of the letter of credit,

has a pending sale, but is unable to purchase the merchandise from

the manufacturer on open account. Export brokers most often use

transferable L/Cs. Transferring a portion of the export L/C to the

manufacturer allows the broker to leverage the buyer's banker's credit

by providing the manufacturer with assurance of payment if the

manufacturer performs under the transferred L/C terms and conditions.

What criteria apply to transfers?

Transfer of letters of credit is governed by Article 48 of the Uniform

Customs and

Practice for Documentary Credits (UCP 500) which

states that banks are under no obligation to transfer a credit except to

- The transferor being a customer of the transferring bank.

- "Negotiation" of the credit being restricted to the transferring bank.

What if the L/C does not meet the bank's transfer criteria?

The bank retains the right to decline a transfer request. It may consent

if certain terms and conditions of the letter of credit are amended to

meet its requirements. Any amendment to a letter of credit is subject to

agreement of the buyer, the buyer's bank, and the beneficiary who is

requesting the transfer. Banks retain the right to decline any transfer


What can be changed when transferring a Letter of Credit?

Article 48 of the UCP 500 limits changes to the following:

- The L/C amount may be reduced.

- Unit prices may be reduced.

- The expiry and latest shipping dates may be curtailed.

- If an insurance document is required, the coverage may be

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