A transferable letter of credit is designed to provide greater flexibility to parties entering into a business transaction based on credit. This type of letter of credit is used when there is the need for two different sets of parties to be paid from the transaction. It is also used when the initial beneficiary of the letter of credit may not be the final recipient of the funds.

In a transferable letter of credit, the applicant is the individual or business that initiates the request for a letter of credit. The buyer is obligated to make payment according to the terms of the credit, should the conditions be met. The first beneficiary is the party to whom the initial payment under the letter of credit is to be made. This can be a bank, merchant, or other entity. The second beneficiary is the party to whom the remaining funds under the letter of credit are to be paid. This recipient can be the same as the first beneficiary, or different.

The terms of the transferable letter of credit is set out by the applicant. This usually includes the amount of the credit, any specific restrictions, and the payment details. Should it become necessary for the funds to be transferred, the applicant must grant approval for the transfer. The initial beneficiary or a third party, such as a bank, submits a request for authorization to transfer the funds. This request is evaluated, and if approved, the transaction takes place.

In addition to allowing multiple parties to be paid from the same transaction, transferable letters of credit can also be beneficial in international transactions. By providing for the transfer of the credit to a second beneficiary, the potential for risk is reduced. In the event of a dispute between the original parties involved, the second beneficiary can still be assured of payment under the terms of the letter of credit.

Transferable letters of credit have become relied on in many situations where payment is expected but may not be made due to any number of reasons. This type of arrangement provides a guarantee to both the buyer, who will be assured of payment when the specified conditions are met, and the seller, who can be assured of payment regardless of the outcome.