【Trade Finance】How a Transferable LC Works for Commodity Traders
Quote from chief_editor on April 22, 2026, 1:46 amTransferable LC commodity trading explained: learn how intermediary traders use a transferable letter of credit to pay suppliers without revealing their identity.
A transferable Letter of Credit (LC) is a credit instrument that explicitly allows the first beneficiary — typically an intermediary trader — to transfer all or part of the LC to one or more second beneficiaries, who are usually the actual suppliers or producers. This structure allows an intermediary to use the buyer's bank commitment to pay their own supplier, without needing to open a separate back-to-back LC or commit their own capital to fund the supplier payment.
Transferable LCs are governed by Article 38 of the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC). A credit is only transferable if it is explicitly marked as such by the issuing bank. An LC that does not state it is transferable cannot be transferred, regardless of what the parties agree between themselves.
How the Transfer Process Works Step by Step
First, the buyer opens a transferable LC in favor of the intermediary trader — the first beneficiary — through the issuing bank. The LC is marked transferable and specifies the goods, shipment terms, and document requirements.
Second, the intermediary instructs the transferring bank — usually the advising bank — to transfer the LC to the supplier, the second beneficiary. The transfer can cover the full LC amount or a portion of it. The transferred LC replicates the terms of the original but with two permitted changes: the unit price can be reduced (allowing the intermediary to substitute a lower-price invoice for the supplier while presenting a higher-price invoice to the buyer), and the expiry date can be shortened.
Third, the supplier ships the goods and presents documents to the transferring bank under the transferred LC. The bank pays the supplier.
Fourth, the intermediary substitutes their own commercial invoice — at the higher price agreed with the buyer — for the supplier's invoice, and presents the complete document set under the original LC to the issuing bank. The issuing bank pays the intermediary. The difference between the two invoice amounts is the intermediary's gross margin.
For example, assume a trading company receives a transferable LC from a European buyer for USD 3.5 million for 500 metric tons of refined copper cathode at USD 7,000 per metric ton. The trader transfers USD 3.25 million of the LC to a copper refinery in Chile at USD 6,500 per metric ton. The refinery ships and presents documents; the transferring bank pays the refinery USD 3.25 million. The trader substitutes an invoice at USD 7,000 per metric ton, presents it under the original LC, and receives USD 3.5 million — retaining USD 250,000 as margin.
Key Differences Between Transferable LCs and Back-to-Back LCs
The transferable LC and back-to-back LC achieve a similar commercial outcome — paying the supplier using the buyer's credit — but they differ in important ways. A transferable LC requires the buyer's bank to explicitly issue a transferable credit, which means the buyer knows an intermediary is involved, even if they do not see the supplier's identity or price. A back-to-back LC is opened independently by the intermediary's bank and does not require the buyer to agree to transfer — but it does require the intermediary's bank to accept the risk of issuing a second LC against the first.
The transferable LC is simpler and cheaper to administer than a back-to-back structure, but it reveals more to the buyer about the transaction structure. For intermediaries who prefer to keep their supply chain confidential, back-to-back is preferable despite the additional cost and complexity.
A transferable LC gives an intermediary the ability to pay their supplier using the buyer's bank commitment — but only when the buyer's bank has issued the credit with explicit transferability, making buyer cooperation a precondition that back-to-back structures do not require.
Keywords: transferable LC commodity trading explained intermediary | transferable letter of credit, first second beneficiary LC, LC transfer commodity trade, intermediary trade finance LC, UCP 600 transferable credit
Words: 622 | Source: ICC UCP 600 Article 38; Industry knowledge — WorldTradePro editorial research | Created: 2026-04-09
Transferable LC commodity trading explained: learn how intermediary traders use a transferable letter of credit to pay suppliers without revealing their identity.
A transferable Letter of Credit (LC) is a credit instrument that explicitly allows the first beneficiary — typically an intermediary trader — to transfer all or part of the LC to one or more second beneficiaries, who are usually the actual suppliers or producers. This structure allows an intermediary to use the buyer's bank commitment to pay their own supplier, without needing to open a separate back-to-back LC or commit their own capital to fund the supplier payment.
Transferable LCs are governed by Article 38 of the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC). A credit is only transferable if it is explicitly marked as such by the issuing bank. An LC that does not state it is transferable cannot be transferred, regardless of what the parties agree between themselves.
How the Transfer Process Works Step by Step
First, the buyer opens a transferable LC in favor of the intermediary trader — the first beneficiary — through the issuing bank. The LC is marked transferable and specifies the goods, shipment terms, and document requirements.
Second, the intermediary instructs the transferring bank — usually the advising bank — to transfer the LC to the supplier, the second beneficiary. The transfer can cover the full LC amount or a portion of it. The transferred LC replicates the terms of the original but with two permitted changes: the unit price can be reduced (allowing the intermediary to substitute a lower-price invoice for the supplier while presenting a higher-price invoice to the buyer), and the expiry date can be shortened.
Third, the supplier ships the goods and presents documents to the transferring bank under the transferred LC. The bank pays the supplier.
Fourth, the intermediary substitutes their own commercial invoice — at the higher price agreed with the buyer — for the supplier's invoice, and presents the complete document set under the original LC to the issuing bank. The issuing bank pays the intermediary. The difference between the two invoice amounts is the intermediary's gross margin.
For example, assume a trading company receives a transferable LC from a European buyer for USD 3.5 million for 500 metric tons of refined copper cathode at USD 7,000 per metric ton. The trader transfers USD 3.25 million of the LC to a copper refinery in Chile at USD 6,500 per metric ton. The refinery ships and presents documents; the transferring bank pays the refinery USD 3.25 million. The trader substitutes an invoice at USD 7,000 per metric ton, presents it under the original LC, and receives USD 3.5 million — retaining USD 250,000 as margin.
Key Differences Between Transferable LCs and Back-to-Back LCs
The transferable LC and back-to-back LC achieve a similar commercial outcome — paying the supplier using the buyer's credit — but they differ in important ways. A transferable LC requires the buyer's bank to explicitly issue a transferable credit, which means the buyer knows an intermediary is involved, even if they do not see the supplier's identity or price. A back-to-back LC is opened independently by the intermediary's bank and does not require the buyer to agree to transfer — but it does require the intermediary's bank to accept the risk of issuing a second LC against the first.
The transferable LC is simpler and cheaper to administer than a back-to-back structure, but it reveals more to the buyer about the transaction structure. For intermediaries who prefer to keep their supply chain confidential, back-to-back is preferable despite the additional cost and complexity.
A transferable LC gives an intermediary the ability to pay their supplier using the buyer's bank commitment — but only when the buyer's bank has issued the credit with explicit transferability, making buyer cooperation a precondition that back-to-back structures do not require.
Keywords: transferable LC commodity trading explained intermediary | transferable letter of credit, first second beneficiary LC, LC transfer commodity trade, intermediary trade finance LC, UCP 600 transferable credit
Words: 622 | Source: ICC UCP 600 Article 38; Industry knowledge — WorldTradePro editorial research | Created: 2026-04-09