Notice. This article is informational only. Any use of documentary credit structures remains subject to issuing bank terms, confirming or financing bank appetite, document compliance and applicable UCP rules.
Transferable Letter of Credit vs Back to Back Letter of Credit vs Assignment of Proceeds
These three concepts are often confused because they are used in similar intermediary trade situations. In reality, they are not the same. One transfers the credit itself, one creates a second credit, and one only redirects the payment proceeds.
If a trader, brokered supplier chain or intermediary is relying on a documentary credit structure, the distinction matters because it affects control, confidentiality, bank risk, document flow and cost.
The Short Version
- Transferable letter of credit: one original credit is transferred from the first beneficiary to a second beneficiary.
- Back to back letter of credit: a second and separate credit is issued using the first credit as security or comfort.
- Assignment of proceeds: the original beneficiary keeps control of the credit, but assigns the right to receive payment proceeds in whole or in part.
Transferable Letter of Credit
A transferable letter of credit is a documentary credit that expressly states it is transferable. That point matters. A credit is not transferable simply because the beneficiary wants it to be. The issuing terms must permit transfer.
In this structure, the first beneficiary asks the transferring bank to transfer all or part of the credit to a second beneficiary, usually the actual supplier. The second beneficiary then presents documents under the transferred credit. The first beneficiary commonly retains the right to substitute its own invoice, and in some cases its own draft, before the documents move onward.
This is often used where an intermediary trader does not manufacture or supply the goods itself and needs the upstream supplier to rely on the same LC framework.
Back to Back Letter of Credit
A back to back letter of credit is not a transfer of the original credit. It is a separate second LC issued in favor of the supplier. The first LC, usually received by the intermediary from the buyer, is used as the supporting security or comfort for issuance of the second LC.
This structure is common where the original LC is not transferable, or where the intermediary wants tighter control over the supplier-side terms. It can also offer better confidentiality because the supplier does not necessarily see the full terms of the original buyer-side credit.
The trade-off is that there are now two instruments instead of one. That means more bank involvement, more cost, more document management and more structural complexity.
Assignment of Proceeds
Assignment of proceeds is narrower than both of the structures above. It does not transfer the letter of credit itself and it does not make the supplier a beneficiary under the credit.
The original beneficiary remains the beneficiary, remains responsible for presentation and remains the party dealing with the LC mechanics. What is assigned is only the right to receive payment proceeds once the credit is drawn and paid.
This is often used where the intermediary wants to retain full documentary control but wants part or all of the payment flow redirected to another party, usually the upstream supplier or a financing party.
Comparison Table
| Point Of Comparison | Transferable Letter Of Credit | Back To Back Letter Of Credit | Assignment Of Proceeds |
|---|---|---|---|
| Number of credits involved | One original credit | Two separate credits | One original credit |
| Can the supplier present documents under the LC? | Yes, as second beneficiary under the transferred credit | Yes, under the second LC issued in its favor | No, not by reason of the assignment alone |
| Does the original beneficiary stay in control? | Partially, depending on the structure and substitution rights | Usually more strongly, because it sits between two separate LCs | Yes, documentary control remains with the original beneficiary |
| Is the supplier visible inside the LC structure? | Yes | Not necessarily to the same degree | Not as beneficiary under the LC |
| Main purpose | Use one transferable LC to support upstream supply | Create a supplier-side LC backed by the original LC | Redirect payment proceeds only |
When A Transferable LC Makes Sense
- The original credit expressly allows transfer.
- The intermediary is comfortable with the supplier operating within the transferred LC framework.
- The bank handling the transaction is willing to process the transfer.
- The parties are comfortable with the supplier being visible within the structure.
When A Back To Back LC Makes Sense
- The original credit is not transferable.
- The intermediary wants tighter control over supplier-side terms.
- The intermediary wants more confidentiality between buyer and supplier.
- The banks involved are comfortable supporting the second LC issuance.
When Assignment Of Proceeds Makes Sense
- The intermediary wants to remain the sole beneficiary under the LC.
- The supplier only needs to receive money, not beneficiary rights under the credit.
- The documentary presentation will still be handled by the original beneficiary.
- The structure does not require transfer of the LC itself.
Practical Issue: Control vs Simplicity
The cleanest structure is often the transferable LC, but only if the original credit allows transfer and the intermediary is comfortable with that level of visibility. The back to back LC offers more control and sometimes more confidentiality, but it is heavier, more expensive and more operationally demanding. Assignment of proceeds is the narrowest tool. It is useful where payment redirection is enough and no transfer of documentary rights is required.
Final Distinction
Transferable LC
Transfer of the credit itself.
Back To Back LC
Issuance of a second credit against the first.
Assignment Of Proceeds
Transfer of the payment proceeds only, not beneficiary rights.
Disclosure. FG Capital Advisors provides advisory and transaction support services only. We do not issue documentary credits in our own name. Any LC structure depends on third-party bank approval, wording, compliance and execution capacity.
