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Definition of Transferable Letter of Credit
Transferable Letter of Credit is a credit facility in which the first beneficiary has the right to pass on the available credit to another party i.e. secondary beneficiary. This is possible only when the Letter of Credit is marked as transferable by the issuing bank upon the instructions of the buyer or the importer of goods.
Let us under the concept in simple words:
Concept of Transferable Letter of Credit
There are four parties involved in it. The parties are first beneficiary, secondary beneficiary, final buyer and the bank. The middlemen/exporter i.e. the first beneficiary is one who receives an order from the final buyer. The middlemen is always in shortage of money. So, he requests the final buyer for Transferable Letter of Credit. If the final buyer finds it valuable to engage in the foreign transaction, he will request his bank to issue Irrevocable Transferable Letter of Credit. Now the first beneficiary can purchase the raw materials from the supplier to manufacture goods. Instead of making a cash payment, the middlemen can pay his supplier by giving him the Transferable Letter of Credit. Here the supplier becomes the secondary beneficiary.
Let us understand it with the help of an example.
Example of Transferable Letter of Credit
Kira Ltd, a German company places an order to Sim Ltd., an American company. Sim Ltd. requests Kira Ltd to issue a Transferable Letter of Credit so that it can avail credit facility from its supplier on the basis of such letter of credit. Kira Ltd. requests its bank to issue Transferable Letter of Credit. In this scenario, if the bank refuses to issue Transferable Letter of Credit, Sim Ltd. cannot further avail credit facilities. However, if the bank agrees to the request of Kira Ltd., Sim Ltd. can issue the Transferable Letter of Credit to its supplier i.e. the secondary beneficiary.
Transferable Letter Of Credit vs. Back-To-Back Letter Of Credit
Back-to-Back Letter of Credit acts as an alternative to Transferable Letter of Credit. Back-to-Back Letter of Credit provides the middlemen/first beneficiary/exporter the right to use the original Letter of Credit as a security in favour of the supplier i.e. the secondary beneficiary.
On the other hand, it also acts as a credit document but with a little difference. Here the middlemen / first beneficiary/exporter request the buyer to issue a Transferable Letter of Credit so that he can endorse it further to the supplier of the material i.e. the secondary beneficiary. If the Letter of Credit is not transferable, it cannot be handed over to the supplier.
Non-Transferable Letter of Credit
Non-Transferable Letter of Credit is exactly opposite of Transferable Letter of Credit. In Non-Transferable Letter of Credit, the bank refuses to allow the transfer of credit to any other beneficiary other than the first beneficiary. Thus, it cannot be transferred to any party and only exporter/middlemen/first beneficiary can claim the credit for it.
It has become an important credit facility tool for the businesses. It promotes international trade. With Transferable Letter of Credit, the exporter gets the opportunity to expand its business and avail the credit facility with its suppliers. The rate at which the world economies are growing, tools like Transferable Letter of Credit promotes trade among nations. Going forward Transferable Letter of Credit shall form an integral part of the business.