Transferable letter of credit
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A trader in the middle passes the buyer's letter of credit on to its own supplier, so the supplier is paid under the buyer's bank promise.
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01 · In plain words
A trader in the middle can pass the buyer's letter of credit to its supplier
A , or LC, is a bank's promise to pay a seller when the seller meets the LC's terms (US International Trade Administration).
A , or transferable LC, is one the seller can pass on. The seller named in the LC is the . It can transfer the LC, fully or partly, to one or more other parties. Each of them is a (ICC Academy). The bank's duty to pay can then pass to them, in full or in part (US ITA).
This suits a trader who buys goods from a supplier and sells them on to a buyer. The trader passes the buyer's LC to the supplier. Later, the trader swaps in its own invoice and collects the difference between the two invoices. This keeps the trader's profit private (House of Lords).
Two conditions apply. The LC must clearly say it is transferable. And a bank transfers it only to the extent and in the way that bank agrees to (ICC Academy).
Who is involved
- The buyer, called the , asks its bank for the LC.
- The trader in the middle, the first beneficiary, is named in the LC and asks for the transfer.
- The supplier, the second beneficiary, receives the transferred LC and ships the goods.
- The buyer's bank, the , makes the promise to pay.
- The makes the transfer to the supplier.
- Sometimes a adds its own promise. The transfer then carries that confirmation too. See Confirmed letter of credit.
02 · How it works
Eight steps take the LC from the buyer, through the trader, to the supplier and back
Figure 1 · Interactive
A transferable letter of credit, step by step
Read down the steps. The supplier is paid on its documents, and the trader collects the difference.
Sources: ICC Academy, Types of documentary credit: a comprehensive guide (UCP 600 article 38); House of Lords, Jackson v Royal Bank of Scotland, 2005 on invoice substitution; US ITA, Trade Finance Guide, July 2022.
03 · What it means for you
The trader keeps its margin private, the supplier gets a bank's promise, and the buyer pays on matching documents
Figure 2 · Interactive
What a transferable LC means for each side
Choose your place in the trade.
04 · Worked example
On a $1 million transferable LC, the trader keeps $99,100 in this illustration
This example uses round, made-up numbers. The buyer's LC is for $1,000,000: 10,000 units at $100.00 each. On transfer, the trader cuts the unit price to $90.00 for the supplier. The transfer fee is 0.10% of the amount transferred, paid by the trader. Real prices and fees vary by bank, country and deal.
Figure 3 · Illustrative
How $1,000,000 splits between supplier and trader
Illustrative inputs. The trader's net is highlighted.
Made-up prices and fee, worked out by our checking script. Your bank's fees will differ by bank, country and deal.
05 · When to use it
A transferable LC suits a trader who sells on a supplier's goods with one transfer step
Good fit when
- You buy goods from a supplier and sell them to a buyer, and you want the buyer's bank promise passed to your supplier (ICC Academy; US ITA).
- You want to keep your profit private by swapping in your own invoice (House of Lords).
- You are the supplier, and a trader offers to pass you its buyer's LC, so you have a bank's promise to pay before you ship.
Another tool may suit better when
- The buyer will not agree to an LC that says it is transferable, or no bank agrees to make the transfer (ICC Academy). Look at a back-to-back letter of credit, which uses two separate LCs.
- The chain has more than one middle step. A transferred LC cannot be transferred again at the supplier's request. A back-to-back LC may suit better.
- You sell your own goods straight to the buyer, with no trader in between. Look at a sight letter of credit.
06 · Rules and a real case
Article 38 of UCP 600 sets the transfer rules, and a court held a bank liable for revealing a trader's profit
When an LC says it follows , those ICC rules apply. Article 38 covers transferable LCs. The rules have been in force since July 1, 2007 (ICC). Banks check documents using , 2023 edition (ICC). The , version 2.1, covers documents sent electronically (ICC).
A real case. In Jackson v Royal Bank of Scotland, decided by the House of Lords on January 27, 2005, a trader called Samson bought dog chews from Pet Products in Thailand and sold them on to Economy Bag. Samson used a transferable LC and transferred the rest of it to Pet Products as second beneficiary. On March 15, 1993, the bank sent documents, including Pet Products' invoice, to Economy Bag by mistake. That showed Economy Bag the large profit Samson was making. The trial judge awarded $124,500 before interest. The House of Lords restored that award (judgment, part 1; part 2). The LC in this case came before UCP 600.
Summary
A transferable LC lets a trader pass the buyer's bank promise to its supplier and keep its margin private
The trader in the middle passes the LC to its supplier, who is paid on matching documents. The trader then swaps in its own invoice and collects the difference. It works for one transfer step, and only when the LC says it is transferable and a bank agrees to transfer it.
Related guides: Letters of credit; The payment terms spectrum; The trade documents checklist. Related cards: Back-to-back letter of credit; Letter of credit (sight); Confirmed letter of credit. Every term is in the Trade Finance Glossary.
Sources
- ICC Academy (David Meynell, ICC Banking Commission), Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: definition, UCP 600 article 38 transfer terms, bank consent, one transfer step, transfer charges, back-to-back LCs
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), Chapter 4, July 2022. Supports: what an LC is, the payment duty passing to the second beneficiary, payment on documents, discrepancies
- House of Lords, Jackson and another v Royal Bank of Scotland [2005] UKHL 3, part 1, January 27, 2005. Supports: invoice substitution, keeping the trader's profit private, the real case
- House of Lords, Jackson and another v Royal Bank of Scotland [2005] UKHL 3, part 2, January 27, 2005. Supports: the outcome of the appeal
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: the rules an LC can follow
- International Chamber of Commerce, International Standard Banking Practice (ISBP), 2023 edition, 2023. Supports: document checking practice
- International Chamber of Commerce, eUCP Version 2.1, June 29, 2023. Supports: electronic presentation
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