A transferable letter of credit is one that can be extended in whole or in part to a second beneficiary. This, at the request of the original beneficiary or first beneficiary.
In other words, a transferable letter of credit is one that, as its name suggests, can be transferred only in part or in full. In other words, the transfer can be made for the entire amount of the document or only for part of it.
The usual thing is that letters of credit are used in foreign trade operations. Thus, these documents are issued by commercial banks to ensure the payment of goods.
The letter of credit guarantees the seller or exporter that, once the conditions of the sales contract have been fulfilled, the issuing bank of the document is responsible for the corresponding payment for the sale.
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The purpose of using a letter of credit is to provide greater confidence to the agents who are carrying out the transaction. This, in a context in which both parties (importer and exporter) are in different parts of the world.
Parts of a transferable letter of credit
The parties involved in a transferable letter of credit are:
- Applicant: The buyer or importer who requests the letter of credit from the bank.
- First beneficiary: It is usually the intermediary.
- Second beneficiary: It is the seller or exporter who finally receives the letter as a guarantee of payment for his merchandise.
Some considerations about the transferable letter of credit:
- The bank that issues the document will evaluate the applicant as in any financing request.
- When transferring, the expiration date of the letter can be shortened, as well as the last date of presentation of the documents and the period of shipment.
- Any unit price indicated on the letter may be reduced.
- The letter may include a clause that makes it transferable only within the country of the first beneficiary.
- Unless otherwise stated, it is a one-time transferable document. That is, it cannot be transferred to a third beneficiary.
Example of transferable letter of credit
Suppose that importer A commissions an intermediary to purchase merchandise. For this, a transferable letter of credit for the amount of 15,000 euros has been requested from the bank. Said document is extended to the intermediary, who is the first beneficiary.
Once the intermediary finds the supplier of the merchandise, he asks the bank to transfer the letter of credit to the exporter. This, for an amount of 15,000 euros or less, depending on the agreement reached in the sale.