【Trade Mechanics】How a Transferable LC Differs from a Back-to-Back LC
Quote from chief_editor on June 2, 2026, 3:00 amTransferable LC vs back-to-back LC in commodity trading explained. Learn how each structure works and when intermediary traders use one over the other.
Transferable Letter of Credit (LC) and back-to-back LC are two financing structures used by intermediary commodity traders to pay a supplier using a Letter of Credit received from their buyer. Both structures allow the intermediary to act as middleman without committing their own capital upfront. The difference between a transferable LC and a back-to-back LC is that the transferable LC is a single instrument issued by the buyer's bank that can be transferred to the supplier, while the back-to-back LC involves two separate LCs — one issued in favor of the intermediary and a second issued by the intermediary's bank in favor of the supplier.
The choice between these two structures has significant implications for bank relationships, legal obligations, and the intermediary's ability to protect their commercial margin.
How a Transferable LC Works
A transferable LC must be explicitly marked as transferable by the buyer's bank at the time of issuance. Under a transferable LC, the intermediary (called the first beneficiary) instructs the transferring bank to transfer the LC — in whole or in part — to the supplier (called the second beneficiary). The supplier receives a transferred LC directly from the buyer's bank, and can present documents against it in the same way as against any LC.
The intermediary retains the right to substitute their own invoice and draft for those of the supplier before the transferred LC documents are presented to the buyer's bank. This document substitution is how the intermediary protects their margin: the supplier presents documents showing a lower price (the purchase price), and the intermediary substitutes an invoice for the higher price (the sale price), keeping the difference.
For example, assume a buyer in Egypt opens a transferable LC for $3 million in favor of a Singapore trading company. The trading company transfers $2.8 million of that LC to a Malaysian supplier. The Malaysian supplier ships palm oil and presents documents under the transferred LC. The Singapore intermediary substitutes its own invoice for $3 million. The documents are presented to the buyer's bank, which pays $3 million — $2.8 million flows to the Malaysian supplier and $200,000 is retained by the Singapore intermediary as gross margin.
Key Differences in Practice
A transferable LC requires the buyer's explicit agreement. By accepting a transferable LC, the buyer implicitly acknowledges that the intermediary is not the original source of supply. Some buyers object to transferable LCs because it reveals the existence and identity of the underlying supplier, which the intermediary may prefer to keep confidential. This confidentiality concern is a significant commercial reason why intermediaries prefer back-to-back LCs.
In a back-to-back LC structure, the buyer's bank issues the Master LC entirely in favor of the intermediary. The buyer does not know that a second LC will be issued to a supplier — the intermediary's supply arrangements remain confidential. The intermediary's bank issues the back-to-back LC independently, based on the security of the Master LC.
From a bank's perspective, a transferable LC is simpler to administer because there is only one LC and one set of obligations. A back-to-back LC creates two independent bank obligations, and the intermediary's bank must be comfortable that the Master LC is reliable security for the back-to-back LC it issues.
The risk profile differs: in a transferable LC, if the intermediary fails to substitute documents correctly, the second beneficiary (the supplier) may claim directly against the buyer's bank for the transferred amount — the buyer's bank is directly exposed to the supplier. In a back-to-back structure, the buyer's bank is only exposed to the intermediary; the supplier deals only with the intermediary's bank.
A transferable LC and a back-to-back LC both allow an intermediary to fund supplier payment using buyer credit — the choice between them depends on how much confidentiality the intermediary needs, the buyer's willingness to accept transferability, and the intermediary's bank's capacity to issue the second instrument.
Transferable LC vs back-to-back LC in commodity trading explained. Learn how each structure works and when intermediary traders use one over the other.
Transferable Letter of Credit (LC) and back-to-back LC are two financing structures used by intermediary commodity traders to pay a supplier using a Letter of Credit received from their buyer. Both structures allow the intermediary to act as middleman without committing their own capital upfront. The difference between a transferable LC and a back-to-back LC is that the transferable LC is a single instrument issued by the buyer's bank that can be transferred to the supplier, while the back-to-back LC involves two separate LCs — one issued in favor of the intermediary and a second issued by the intermediary's bank in favor of the supplier.
The choice between these two structures has significant implications for bank relationships, legal obligations, and the intermediary's ability to protect their commercial margin.
How a Transferable LC Works
A transferable LC must be explicitly marked as transferable by the buyer's bank at the time of issuance. Under a transferable LC, the intermediary (called the first beneficiary) instructs the transferring bank to transfer the LC — in whole or in part — to the supplier (called the second beneficiary). The supplier receives a transferred LC directly from the buyer's bank, and can present documents against it in the same way as against any LC.
The intermediary retains the right to substitute their own invoice and draft for those of the supplier before the transferred LC documents are presented to the buyer's bank. This document substitution is how the intermediary protects their margin: the supplier presents documents showing a lower price (the purchase price), and the intermediary substitutes an invoice for the higher price (the sale price), keeping the difference.
For example, assume a buyer in Egypt opens a transferable LC for $3 million in favor of a Singapore trading company. The trading company transfers $2.8 million of that LC to a Malaysian supplier. The Malaysian supplier ships palm oil and presents documents under the transferred LC. The Singapore intermediary substitutes its own invoice for $3 million. The documents are presented to the buyer's bank, which pays $3 million — $2.8 million flows to the Malaysian supplier and $200,000 is retained by the Singapore intermediary as gross margin.
Key Differences in Practice
A transferable LC requires the buyer's explicit agreement. By accepting a transferable LC, the buyer implicitly acknowledges that the intermediary is not the original source of supply. Some buyers object to transferable LCs because it reveals the existence and identity of the underlying supplier, which the intermediary may prefer to keep confidential. This confidentiality concern is a significant commercial reason why intermediaries prefer back-to-back LCs.
In a back-to-back LC structure, the buyer's bank issues the Master LC entirely in favor of the intermediary. The buyer does not know that a second LC will be issued to a supplier — the intermediary's supply arrangements remain confidential. The intermediary's bank issues the back-to-back LC independently, based on the security of the Master LC.
From a bank's perspective, a transferable LC is simpler to administer because there is only one LC and one set of obligations. A back-to-back LC creates two independent bank obligations, and the intermediary's bank must be comfortable that the Master LC is reliable security for the back-to-back LC it issues.
The risk profile differs: in a transferable LC, if the intermediary fails to substitute documents correctly, the second beneficiary (the supplier) may claim directly against the buyer's bank for the transferred amount — the buyer's bank is directly exposed to the supplier. In a back-to-back structure, the buyer's bank is only exposed to the intermediary; the supplier deals only with the intermediary's bank.
A transferable LC and a back-to-back LC both allow an intermediary to fund supplier payment using buyer credit — the choice between them depends on how much confidentiality the intermediary needs, the buyer's willingness to accept transferability, and the intermediary's bank's capacity to issue the second instrument.