Definition A transferable letter of credit is a credit facility that the first beneficiary can transfer to another party or the second beneficiary. Such a financial guarantee is applicable when the sellers of goods are agents/dealers and are not the suppliers or manufacturers themselves. This LC gives the sellers the authority to advise the bank to make the credit available wholly or in part to one or more second beneficiaries. In this arrangement, the first beneficiary has the right to pass on the available credit to the secondary beneficiary, which may involve more than one party. This is only possible when the buyer marks the LC as transferable to the issuing bank. Why is a Transferable Letter of Credit Required? Most transfers involve a beneficiary of the LC, usually a seller, who has a pending sale but cannot complete the merchandise order from the manufacturer on an open account. Export brokers generally use transferable LCs. By transferring a portion of the export LC to the manufacturer, the broker can leverage the buyer's banker's credit. This is done by providing the manufacturer assurance of payment if they comply with the terms and conditions of the transferrable LC. How to Apply for a Transferable Letter of Credit? The process of applying for a transferable LC is almost the same as applying for a loan. The buyer must submit an LC application that includes their credit profile details. The bank will then evaluate the credit score and the buyer's financial stability in the underwriting process. After the approval, the LC will mention that the bank is willing to issue a loan for a certain amount to the buyer if needed to cover the order payment with the seller. How does a Transferable Letter of Credit Work? The transferable LC creates a redeemable facility between all the parties involved. The buyer of the goods requests a bank to be an intermediary in the process. It means that the bank is assuring the seller that the buyer will pay them. This is an essential step in the transaction because the seller can process the order further only after possessing the guarantee of payment. The LC offers them that assurance. A transferable LC includes the provision of extending the credit to the second beneficiary. So, in this instance, the second beneficiary is responsible for paying off the loan. Transferable Letter of Credit Insurance Calculation The percentage for which the insurance cover must be effected on a transferable LC can be increased to provide the amount of cover mentioned in the credit. The insurance policy coverage is up to 110% of the invoice value, in the currency of invoice in the banks' name, and covers all risks mentioned in the standard agreement clause. If a shipment on deck arrangement is permitted under the LC, the insurance must also cover the risk of discarding the goods or the goods getting washed overboard. The validity of the insurance should align with the LC or contract terms. Transferable Letter of Credit - Charges All charges incurred in respect of a transfer must be paid by the first beneficiary unless agreed otherwise at the time of transfer. These charges include commissions, fees, costs, and/or other expenses. Transferable Letter of Credit - Example Kento, an Italian firm, places an order to United Services, an American company. United Services requests Kira Ltd to issue a transferable LC, allowing them to avail credit facility from its supplier based on this letter. Kento writes to its bank to issue a transferable LC. If the bank agrees to the request, United Services can issue the transferable LC to its supplier, i.e., the secondary beneficiary.