Transferable Letter of Credit

A Transferable Letter of Credit is used in cases where there are three parties to a transaction; an Importer (Buyer), Exporter (Supplier), and an intermediary party, such as a broker, who is responsible for arranging the sale.

In such a transaction, the intermediary party requests a Letter of Credit from the Importer as protection against non-payment. 

The Exporter, in turn, wants assurance from the intermediary party that payment will be made, and will also request a Letter of Credit. 

It may be the case, however, that the intermediary party has little working capital or does not have access to a line of credit with its bank to issue a separate Letter of Credit to the Exporter. As an alternative, the intermediary party may provide such assurance to the Exporter by transferring over a portion of the Letter of Credit it received from the Importer. This is termed a Transferable Letter of Credit.

To be able to transfer a Letter of Credit, the intermediary party must specifically request a Transferable Letter of Credit from the Importer.

The Letter of Credit must nominate a bank, generally the Advising Bank, who is authorized to effect a transfer.

The intermediary party would be the Beneficiary of the Letter of Credit and, in a Transferable Letter of Credit transaction, is referred to as the First Beneficiary. The First Beneficiary would then ask the Transferring Bank to transfer, in part or in full, its rights under the Letter of Credit to the manufacturer of the goods, who is referred to as the Second Beneficiary.

A Transferable Letter of Credit may be transferred only once; therefore, a Second Beneficiary is unable to transfer a portion of a Transferable Letter of Credit to a third beneficiary. It may, however, be transferred to more than one Second Beneficiary, in which case the L/C must state that partial shipments are allowed.

The following is a simplified example of a Transferable Letter of Credit transaction:

Importer: ABC Buyer, Hong Kong

Intermediary Party (Middleman): UK Trading Company Ltd

Supplier: XYZ Supplier Company Ltd, UK

Issuing Bank: WorldWide Bank

Transferring Bank: Big Bank UK PLC

As per ABC Buyer’s instructions, WorldWide Bank issued a Transferable Letter of Credit in favour of UK Trading Company Ltd who is acting as the intermediary party in the trade transaction. This Transferable Letter of Credit is in the amount of USD $100,000 and Big Bank UK is authorized and willing to do the transfer.

The description of goods is 5,000 pairs of shoes at USD $20 per pair. Once UK Trading Company Ltd as the First Beneficiary receives the Letter of Credit, it requests Big Bank UK to transfer USD $75,000 to XYZ Supplier Company, stating the same quantity of goods, 5,000 pairs of shoes, but at USD $15 per pair.

Big Bank UK advises the transfer has been made to XYZ Supplier Company Ltd, who now becomes the Secondary Beneficiary of the Letter of Credit.

Once XYZ Supplier Company Ltd has shipped the goods, it presents documents in accordance with the Transferable Letter of Credit, along with its draft for USD $75,000, to Big Bank UK. Big Bank UK then notifies UK Trading Company Ltd of the presentation.

UK Trading Company Ltd will present its own invoice and draft showing a value of USD $100,000 in order to comply with the original Letter of Credit. Big Bank UK checks the documents  then (if all in order) substitutes these documents for those presented by XYZ Supplier Company Ltd and forwards the documents to WorldWide Bank. 

Assuming all documents comply with the L/C terms, Big Bank UK receives USD$100,000 and pays USD $75,000 to XYZ Supplier Company Ltd and USD $25,000 to UK Trading Company Ltd.

Note:

  

It is advisable to request expert advice when requesting a Transferable Letter of Credit, particularly if you do not wish to run the risk of disclosure of names or values to the end buyer and supplier. It is possible to request that the L/C terms stipulate that documents are to be drawn up in such a way that this risk is minimised.

Banks will not however bear any responsibility for inadvertent disclosure within documentation once issued.

Transferable Credits are subject to UCP 600 Article 38.

A Guide to Profitable Importing

To remain competitive and profitable, many companies source raw materials, components and even finished goods from overseas suppliers. There are many reasons why a business may decide to import. Typical examples are:

• Lower labour costs
• Relative strength of the home currency against the supplier’s preferred / local currency.
• Access to skills and materials not available / scarce in the domestic market

Whilst suppliers will be more concerned with securing payment, importing businesses need to ensure that goods will arrive as ordered and in a timely manner. You should consider the following issues:

1. Locating suitable suppliers.  

Whilst lower costs may be a major factor in sourcing from overseas, the appointment of a reputable and experienced supplier will ensure that your reputation with your own customers will not be at risk. Factors to consider are:

• Where is the supplier located?
• Do they have a strong track record regarding quality (eg: meeting British / European standards)?
• Do they deliver on time every time?
• Do you need to appoint a local agent (eg: for regular quality inspection of goods)?
• Are goods presold or held in stock?

2. Transportation and logistics.

• How will the goods be transported - sea, air or road?
• How long will it take for goods to arrive?
• Who bears responsibility for transit risk, cost and other obligations as defined in Incoterms® 2010 (eg: FCA, FOB, CPT, CIP, CFR, CIF, DAP)?
• Have you researched Customs duties / licenses etc? Don’t be caught out with an unexpected bill once the goods arrive in the UK. Research the tariff code applicable to your product. Information can be obtained from HM Revenue & Customs.

3. What payment terms will the supplier offer?

• Payment in advance or on very short credit terms will have a negative impact on your cash flow.
• Consider the transit time of the goods and subsequent stocking times and credit terms given to your own customers.

4. Methods of Payment

• By offering secure / guaranteed payment to your suppliers can you secure longer credit terms?
• Do you need to issue Documentary Letters of Credit to suppliers?
• What will the impact be on your banking facilities?
• Are Letter of Credit terms and conditions favourable to you as well as your supplier?
• What additional costs will you incur?
• What administrative impact will additional banking paperwork create?
• How much is your bank charging you to remit international payments? Are you using the most cost effective payment channels?
• Should you consider an alternative Foreign Exchange / Payment provider who may be able to offer an online more cost effective solution than your bank?

5. Financing Imports.

• What support does your bank provide?
• Are you provided finance that meets your needs / matches your trade cycle?

6. Supply Chain Management.

• How do you manage your physical and financial 'supply chains'?
• Do you work closely with freight forwarders and your bank to optimise delivery of stock and shipping documents / effect timely and cost effective payments?

Import Letters of Credit & Risk Management Training