Letter of Credit Process: Transferable vs Back-to-Back LC

The letter of credit process becomes more complex when the contractual seller is a trading company rather than the manufacturer. The importer buys goods sourced through an intermediary, while the manufacturer wants a reliable payment undertaking before producing or shipping. Connecting those expectations requires more than naming the trading company as beneficiary.

Two common structures are a transferable letter of credit and a back-to-back letter of credit. They can connect the same commercial parties, but create different payment rights, document routes and risks. Assignment of proceeds is a third arrangement—not an equivalent substitute.

The explanations below assume documentary credits expressly subject to UCP 600, the International Chamber of Commerce’s rules for documentary credits. Actual LC wording, bank agreements and applicable law still matter.

Map the letter of credit process before choosing a structure

Consider an illustrative industrial-pump transaction: an importer buys from a trading company, which purchases the pumps from a manufacturer. The manufacturer ships directly to the importer.

There are two sales contracts but one physical shipment. Start by mapping the parties:

• Importer: Buyer under the resale contract and applicant for the buyer-facing LC.
• Trading company: Seller to the importer, buyer from the manufacturer and beneficiary under the buyer-facing LC.
• Manufacturer: Physical supplier, requiring a workable payment arrangement.
• Importer’s issuing bank: Issues the buyer-facing LC in favour of the trading company.
• Advising bank: Advises the credit and checks its apparent authenticity; advising alone adds no payment undertaking.
• Transferring bank or supplier-credit issuing bank: Transfers the existing credit, or issues a separate supplier-facing credit, depending on the structure.

A confirming bank, if involved, adds its own undertaking within the confirmation’s scope. One bank may perform several roles, but those roles are not interchangeable.

Before requesting issuance, draw three routes: goods, documents and money. Identify who prepares each document, who presents it, and which bank undertakes to pay whom.

Transferable LC: make the manufacturer a second beneficiary

A transferable LC allows the trading company, as first beneficiary, to request that the credit be made available wholly or partly to the manufacturer as second beneficiary.

The designation and bank agreement come first

Under UCP 600, the credit must expressly state that it is transferable. A private agreement between the importer and trading company cannot make an ordinary LC transferable.

The transferring bank must also agree to the transfer’s extent and manner. A transferable designation does not compel a bank to process every requested arrangement. Establish the authorised transferring bank and its requirements before the importer finalises the LC.

Follow the supplier payment route

The basic sequence is:

1. The importer arranges a transferable LC naming the trading company as first beneficiary.
2. The trading company requests transfer to the manufacturer on permitted terms.
3. The manufacturer reviews the transferred credit, ships and presents the required documents to the transferring bank.
4. The trading company substitutes its invoice and any draft where permitted.
5. The documents proceed through the credit’s banking chain for examination and settlement under the applicable terms.

The manufacturer receives rights as second beneficiary under the transferred credit. This is more than a promise from the trading company to forward money later, but it does not eliminate document-compliance, bank or country risk. Acting as transferring bank does not, by itself, create a separate payment undertaking.

Changes are limited, not freely negotiated

A transfer is not a blank-sheet supplier LC. Under UCP 600, certain terms may be reduced or curtailed, including the amount, unit price, expiry date, presentation period and latest shipment date. The required insurance percentage may be increased to provide the cover stipulated in the original credit.

Other provisions must follow the original credit, subject to the rules’ specific exceptions. Check the full proposed transfer with the bank rather than assuming every commercial difference can be accommodated.

Back-to-back LC: create a separate supplier-facing credit

With a back-to-back structure, the importer’s LC remains in favour of the trading company. The trading company then asks a bank to issue a second, separate LC in favour of the manufacturer, using the buyer-facing LC as support or security under arrangements agreed with that bank.

The buyer-facing LC is not simply passed onward. The bank separately assesses the trading company, the transaction and its willingness to issue the supplier credit. It may require a credit facility, cash margin or additional security.

Two credits mean two independent obligations

The sequence is:

1. The importer’s bank issues the buyer-facing LC to the trading company.
2. The trading company applies for a supplier-facing LC.
3. The supplier-credit issuing bank approves and issues that credit to the manufacturer.
4. The manufacturer ships and presents documents under the supplier credit.
5. The trading company assembles its own presentation under the buyer-facing credit, reusing suitable documents where possible.

A complying presentation under the supplier LC can require payment even if the trading company cannot obtain payment under the buyer-facing LC.

For example, the supplier credit might accept a document that the buyer credit rejects. The trading company may then face reimbursement obligations to its bank without receiving the expected buyer-credit proceeds.

This independent exposure is the central issue in back-to-back trade finance for intermediaries. The structure offers flexibility, not automatic matching of obligations.

Transferable LC vs back-to-back LC: compare the dependencies

| Decision point | Transferable LC | Back-to-back LC | |---|---|---| | Bank approval | Express transferable wording and transferring bank agreement | Separate approval to issue the supplier credit | | Supplier’s position | Second beneficiary under the transferred credit | Beneficiary under a separate credit | | Differences in terms | Restricted by transfer rules | More flexibility, but mismatches create exposure | | Document route | Supplier presentation to transferring bank, with permitted substitution | Separate presentations requiring coordinated document handling | | Main dependency | Supplier documents must support the transferred-credit structure | Supplier payment obligation may arise without buyer-credit recovery |

Build timing buffers around actual document handling

Do not make the supplier’s last permissible presentation date effectively identical to the trading company’s deadline without assessing processing time.

Allow for:

• Transport and inspection documents becoming available.
• Document delivery to the relevant bank.
• Bank examination and operational handling.
• Invoice substitution or preparation of the onward presentation.
• Correction of discrepancies where correction remains possible.

Buffers must fit the credit wording and shipment schedule. A later expiry alone may not solve an earlier presentation deadline. For back-to-back credits, also compare payment maturities: supplier payment may fall due before buyer-credit proceeds arrive.

Test failure scenarios before issuance

Ask what happens if the manufacturer presents late, an origin document uses unexpected wording, or a transport document cannot support both credits.

Under a transferable LC, supplier discrepancies may prevent payment through the transferred arrangement. Under back-to-back credits, documents can comply with one credit but fail the other. Matching the physical shipment does not automatically match the documentary obligations.

Protect the trading margin without promising anonymity

A transferable LC can support margin protection through invoice substitution. Under UCP 600, the first beneficiary may substitute its own invoice and draft, if any, within the original credit’s amount and unit-price limits, and draw the difference between the invoices where applicable.

That mechanism does not guarantee supplier anonymity.

Transport documents, packing lists, inspection certificates, certificates of origin or product markings may identify the manufacturer. If the first beneficiary fails to provide a substitute invoice or draft on first demand, the transferring bank may be entitled to forward the second beneficiary’s documents without further responsibility to the first beneficiary. Similar consequences can arise if substitution introduces discrepancies that the first beneficiary fails to correct on first demand.

A back-to-back arrangement separates the credits, but shared shipping documents can still reveal the supplier. Customs, logistics and product-compliance requirements may require information that commercial confidentiality preferences cannot remove.

Create a document-visibility matrix showing:

• Who issues each document.
• Which parties receive it.
• Whether it identifies the manufacturer or supplier price.
• Whether lawful substitution or separate issuance is possible.

Use confidentiality and non-circumvention provisions where appropriate, with legal advice. Do not treat an LC as a guarantee against direct contact between buyer and manufacturer.

Why assignment of proceeds is different

Assignment of proceeds concerns money payable to the beneficiary. It does not, by itself, transfer the beneficiary’s right to perform under the credit or present documents as a second beneficiary.

A trading company might assign LC proceeds to its manufacturer even where the credit is not transferable, subject to applicable law and the relevant banking arrangements. The manufacturer’s receipt of money still depends on proceeds becoming payable and available under the assignment.

If the trading company fails to make a complying presentation, there may be no proceeds to distribute.

The distinction is practical: a transferable LC gives the supplier a beneficiary role; an assignment directs proceeds without creating that role. A bank’s acknowledgment of an assignment does not, by itself, constitute an independent payment undertaking to the supplier.

Safe payment terms for importers buying through intermediaries

An LC supports documentary payment discipline; it does not replace the sales contract or guarantee the goods’ actual quality.

When evaluating payment terms for an intermediary transaction, agree:

• Who is contractually responsible for supplying conforming goods.
• Whether the manufacturer is disclosed and independently checked.
• Who receives payment under each banking arrangement.
• Which inspection evidence is required and who issues it.
• How warranties, rejection rights and claims against the seller work.
• Who handles replacement goods, shortages and after-sales support.

Banks examine documents, not the actual goods. Quality remedies against the trading company therefore need to operate through the contract and applicable law, separately from the LC’s documentary payment mechanism.

Prepare your bank discussion checklist

Bring a coordinated transaction file rather than asking only whether the bank offers transferable or back-to-back LCs:

• [ ] Purchase contract with the manufacturer and resale contract with the importer.
• [ ] Proposed buyer-facing LC wording and requested supplier terms.
• [ ] Party identities, bank roles and shipment route.
• [ ] Production, shipment, presentation and payment schedule.
• [ ] Document list identifying issuers, recipients and substitution needs.
• [ ] Requested confidentiality arrangements and known disclosure requirements.
• [ ] Side-by-side terms comparison for any back-to-back structure.
• [ ] Failure scenarios and responsibility for unresolved discrepancies.
• [ ] Expected bank charges, credit-facility requirements and security arrangements.

Ask the bank to confirm feasibility, required approvals and document-handling arrangements before committing either commercial party to the structure.

Frequently asked questions

Can any LC be transferred to a manufacturer?

No. Under UCP 600, it must expressly state that it is transferable, and the transferring bank must agree to the requested transfer’s extent and manner.

Is a back-to-back LC simply a transferred LC?

No. It is a separate supplier-facing credit with its own undertaking. Supplier payment may be due even when the trading company cannot collect under the buyer-facing LC.

Does invoice substitution hide the manufacturer?

Not necessarily. It can help protect the trading margin by replacing the supplier’s invoice, but transport, origin, inspection and other documents may still identify the manufacturer.

Does assignment of proceeds give the supplier presentation rights?

No. Assignment of proceeds does not itself transfer the right to perform or present under the credit. Its value depends on proceeds becoming available and the assignment’s legal and banking arrangements.

Build the commercial relationship, then validate the payment structure

Choose the structure around supplier payment rights, document compatibility and acceptable intermediary exposure—not the label alone.

Ready to find trading partners? Source suppliers or list your business on IMEX Center, then work with your bank and advisers to validate the LC structure before issuance.