A Transferable Letter of Credit is used in instances where there are three parties to a transaction; an Importer (Buyer), Exporter (Supplier), and an intermediary party, who is responsible for arranging the sale transaction.
In such a transaction, the intermediary party requires a Letter of Credit from the Importer as protection against non-payment. The Exporter, in return, requires assurance from the intermediary that payment will be completed, and will also require a Letter of Credit.
It may be the case, however, that the intermediary does not have the financial resources or access to a line of credit with its bank to issue a separate Letter of Credit to the Exporter. As an alternative, the intermediary may provide such assurance to the Exporter by transferring over a portion of the Letter of Credit it received from the Importer. This is known as a Transferable Letter of Credit.
To be able to transfer a Letter of Credit, the intermediary 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 authorised 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 request the Transferring Bank to transfer, in part or in total, its rights under the Letter of Credit to the manufacturer of the products, 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 Letter of Credit must state that partial shipments are permitted.