How a letter of credit works
TRANSFERABLE LETTERS OF CREDIT
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
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 beSource: creditmanagementworld.com