Five Things to Know About the Transferable Letter of Credit

A transferable letter of credit is used mostly in business deals, it is different from all other LOC as it allows for a transferrable provision. As a result of the risk involved in a business, most manufacturers and sellers request for an LC that states they will receive their complete payment at a stipulated time, with a TLC the bank in partnership with the buyer makes room for the transfer of credit to a third party. In a TLC the seller has the right to transfer all or part of the payment to another party but this has to be done with the knowledge of all the parties involved in the transaction. There are majorly three parties involved in this type of LC and they are the buyer, the middle party and the seller.

TLC Approval

The procedure involved in getting a TLC approval can be likened to receiving a bank loan. Firstly, the buyer will need to apply, then the bank scrutinizes and approves if the buyer's financial score meets their requirement. The bank’s approval to issuing a letter of credit means the bank will be ready to loan a given amount if a loan is required.

Bank Transfer Criteria

Sometimes the Letter of Credit might not meet the bank criteria, in such a situation, the bank has a right to refuse such transfer request unless there is an amendment to the terms stated in the TLC and any amendment has to be approved by all parties involved. However, the bank has the right to refuse a transfer request.

The Middle Party Role

In a TLC the middleman is known as the first beneficiary of the LC. He has the right to request from the buyers bank the payment due (whether full or part) as stated in the TLC. However, the manufacturer is known as the second beneficiary.

Security

A TLC creates room for greater security to both beneficiaries, as parties can agree on the terms and conditions of how they want the document drawn. The beneficiaries can decide to minimize risk by agreeing to not disclose names or values.

Finance Support

A TLC is an easy finance support for a buyer in an international or home-based trade agreement, this is because the buyer only needs the approval of one bank to obtain a TLC whereas there are some other scenarios that a buyer will need to get two different LC. Click here to find out more.