Transferable letter of credit

Transferable letter of credit
See also
Reimbursing bank Revolving letter of credit Confirmed letter of credit Payment against documents Conditional sale agreement Payment guarantee Free carrier (FCA) FOB destination Contract note

Transferable letter of credit permits owner (initial beneficiary) to transfer the credit to another beneficiary. It is used in international trade as an alternative to confirmed letter of credit or advance payment. In a transferable letter of credit bank (issuer) includes rules of transfer of the credit to another beneficiary. The secondary beneficiary is usually the seller who receives it as a form of payment.

The party in whose favors the credit is opened is the original beneficiary of the credit. Second beneficiary is the person to whom the credit is transferred in whole or in part, if the letter of credit is a transferable letter of credit. Second beneficiary enjoys almost the same rights as that of original beneficiary (Popoli, G.S., 2013, s.256).

Transfer criteria

The credit transfer can be considered made if:

• First beneficiary is the customer of transferring bank
• All credit terms are accepted by the transferring bank
• The percentage of insurance coverage if required by the original Letter of credit
• Should be issued in an irrevocable form (UCP 600, 2007, art. 38).

Credit should be transferred only when exactly corresponds to the terms of the agreement. The exceptions to this principle are:

• Total amount of the credit
• Unit cost – may be reduced
• Date of the end of the contract – may be decrease
• The last date of shipment or the specified date of shipment
• Expiration date

The name of the first beneficiary can be displace by the name of the customer on the credit card. If the customer name is necessary for the loan to appear in any document other than invoice, such a requirement must be reflected in the transferred loan (UCP 600, 2007, art. 38).

Transmission of documents by second beneficiary must be in transferring bank, which is authorized to make the transfer and is mentioned in the letter of credit.

First Beneficiary may in his request for transfer that negotiation is to be done to a second beneficiary at the place to which the credit has been transferred. This form letter of credit is preferred in trades and transit which beneficiary firm is no the producer of good but is only broker or supplier (Ozkan O, 2016, s.74).

Types of payments letter of credit

Transferable letter of credit is one of the type in terms of payment. Other types of payments are (Bayram O,. 2014, s.51-52):

• Sight Payment Letter of credit
• Deferred Payment Letter of credit
• Acceptance Credit Letter of credit
• Negotiable Letter of credit
• Revolving Letter of credit
• Green Clause Letter of credit
• Red Clause Letter of credit
• Back to Back Letter of credit

Transferable letter of credit or Confirmed letter of credit?

Confirmed letter of credit requires the attention two banks, while the transferable letter of credits is only one bank. For this reason it can be a more convenient way for the buyer makes deal with only one bank.

Examples of Transferable letter of credit

• An importer in the US needs to purchase goods from a seller in India. The seller requires a transferable letter of credit as payment. In this case, the importer will contact a bank in the US to be the issuer of the credit. The importer will provide the bank with all the details of the transaction, including the name of the seller and the value of the goods. The bank will then draft the transferable letter of credit, which will specify the terms of the payment and how it can be transferred to the seller in India.
• A buyer in the UK needs to purchase goods from a seller in China. The seller requires a transferable letter of credit as payment. In this case, the buyer will contact a bank in the UK to be the issuer of the credit. The buyer will provide the bank with all the details of the transaction, including the name of the seller and the value of the goods. The bank will then draft the transferable letter of credit, which will specify the terms of the payment and how it can be transferred to the seller in China.
• An exporter in Germany needs to deliver goods to a buyer in Malaysia. The buyer requires a transferable letter of credit as payment. In this case, the exporter will contact a bank in Germany to be the issuer of the credit. The exporter will provide the bank with all the details of the transaction, including the name of the buyer and the value of the goods. The bank will then draft the transferable letter of credit, which will specify the terms of the payment and how it can be transferred to the buyer in Malaysia.

Advantages of Transferable letter of credit

Transferable letter of credit offers several advantages for the initial beneficiary and the secondary beneficiary. These advantages are:

• The initial beneficiary can transfer the credit to another beneficiary, such as the seller, for payment. This is beneficial for the initial beneficiary as it can reduce their financial risk and cost of trading.
• The secondary beneficiary, such as the seller, can also benefit from a transferable letter of credit as it can provide an assurance of payment and reduce their financial risk.
• Transferable letter of credit is a flexible payment option as it allows the initial beneficiary to transfer the credit to another beneficiary.
• It is a secure payment option as it is governed by the International Chamber of Commerce rules and regulations.
• Transferable letter of credit can also reduce the transaction cost for both parties as the bank assumes the cost of the transfer.

Limitations of Transferable letter of credit

• A transferable letter of credit is more expensive than other payment methods as it involves fees from the issuing bank and the advising bank.
• The transferable letter of credit is limited to two beneficiaries and cannot be transferred to more.
• There are rules and regulations in the transferable letter of credit which limit the transfer of the credit to another beneficiary.
• The original beneficiary must be involved in the transfer of the credit and must be notified of the transfer.
• Transferable letter of credit does not provide a guarantee that the secondary beneficiary will receive payment in full.

Other approaches related to Transferable letter of credit

An introduction to the list of other approaches related to Transferable Letter of Credit is as follows:

Transferable Letter of Credit is a valuable tool in international trade, and there are some other approaches related to it. These include:

• Documentary Credits - A Documentary Credit is a payment method whereby the issuing bank agrees to pay a certain amount of money to a beneficiary, against the presentation of documents that comply with the terms and conditions of the credit.
• Confirmed Letter of Credit - A Confirmed Letter of Credit is a Letter of Credit that is guaranteed by a second bank. The second bank, the confirming bank, adds its confirmation to the letter of credit, guaranteeing payment to the beneficiary.
• Standby Letters of Credit - A Standby Letter of Credit is a guarantee that a bank provides to a beneficiary, in case a third party fails to fulfill its contractual obligations.
• Bank Guarantees - A Bank Guarantee is a guarantee provided by a bank on behalf of a customer in the event that the customer fails to fulfill its contractual obligations.

In summary, Transferable Letter of Credit is a valuable tool in international trade, and there are some other approaches related to it such as Documentary Credits, Confirmed Letter of Credit, Standby Letters of Credit, and Bank Guarantees.

References

• Bayram, O., Omer, O., (2014). Is the letter of credit losing its significance? A new payment method in International Trade International Journal of Arts and Commerce, 3(7), 50-58.
• Kozolchyk, B. (1992). The paperless letter of credit and related documents of title. law and Contemporary Problems, 55(3), 39-101.
• Omer, O., Oguzhan, O., Important and Critical Issues of Complying Presentation Based Upon Letter of Credit (L/C) Payment. Journal of International Trade, Logistics and Law, 2(2), 2016, 73-80.
• Popoli, G.S. (2013). Startegic Credit Management in Banks. PHI, Delhi. s. 253-257.
• Uniform Customs and Practice for Documentary Credits (2007) UCP 600. International Chamber of Commerce.

Author: Beata Kocyłowska