In-depth analysis of the differences and applications of transferable letters of credit and non-transferable letters of credit

Negotiable letters of credit and non-transferable letters of credit are commonly used financial instruments in international trade, and are classified according to the transfer of rights of the beneficiary. This article will elaborate on the definition, characteristics and application of these two letters of credit.

Overview of transferable letters of credit

Transferable L/C refers to a situation where the letter of credit clearly stipulates that it can be transferred. This type of letter of credit allows the first beneficiary (such as the exporter) to request an authorized bank (often called the “transferring bank”) to transfer all or part of the letter of credit to another beneficiary (the second beneficiary). According to the provisions of “UCP500”, the letter of credit will be transferable only if the issuing bank specifically indicates “transferable”. Other expressions in the letter of credit, such as “divisible”, “transferable”, etc., do not constitute the basis for transferability.

It should be noted that a transferable letter of credit can only be transferred once, that is, the first beneficiary can only transfer it to the second beneficiary and has no right to transfer it to a third party. However, this restriction does not apply if the second beneficiary makes a reverse transfer to the first beneficiary. In addition, although the terms of the letter of credit cannot be changed, the amount, unit price of goods, expiry date, etc. can be adjusted within the specified range.

In practice, transferable letters of credit are usually used by intermediaries, who make profits by transferring the letters of credit to actual suppliers. However, it is worth reminding that the transfer of the letter of credit is not equivalent to the transfer of the sales contract; if the second beneficiary fails to deliver the goods as required by the contract or there is a problem with the documents provided, the first beneficiary still needs to bear the contractual liability.

Overview of non-negotiable letters of credit

Non-transferable L/C is a letter of credit in which the beneficiary cannot transfer his rights. In other words, any letter of credit that does not specifically indicate “transferable” is a non-transferable letter of credit. This letter of credit limits its use to the original beneficiary himself.

The use of non-transferable letters of credit is relatively low-risk because the buyer has a good understanding of the beneficiary’s creditworthiness and operating capabilities, and there is no uncertainty caused by the transfer. Therefore, buyers prefer to use non-negotiable letters of credit in most cases to ensure the security and compliance of the transaction.

Summary

In international trade, transferable letters of credit and non-transferable letters of credit each have their own unique functions and applicable fields. Transferable letters of credit are suitable for transactions that require flexible operation and transfer rights, while non-transferable letters of credit are suitable for scenarios that require higher transaction risk control. For all parties involved in the transaction, understanding the characteristics of these two letters of credit is crucial to formulating corresponding trading strategies and preventing risks.