Letters of credit for copper: transferable, non-transferable and back-to-back

A documentary letter of credit (DLC) is a bank's promise to pay the seller when the seller presents documents that match the credit exactly. It is the most common way to secure payment in a copper contract. Whether it is transferable is a frequent sticking point. This guide is general information, not financial advice.

How a letter of credit works

1. Buyer and seller agree the contract and the documents required.
2. The buyer asks its bank to issue the credit (a SWIFT MT700) to the seller's bank.
3. The seller ships or delivers, then presents the documents: invoice, inspection certificate, bill of lading or warehouse documents.
4. If the documents comply, the bank pays. "At sight" means payment on compliant presentation.

Banks check documents, not copper. A credit protects the seller against non-payment, and protects the buyer only as far as the required documents prove what was delivered. Choose the documents carefully.

Transferable credits

Under the ICC rules most credits follow (UCP 600), a credit can be transferred only if the issuing bank has expressly marked it "transferable". The first beneficiary, usually a trader in the middle, can then transfer all or part of it to the actual supplier, often substituting their own invoice so the supplier and the end buyer don't see each other's prices. A transferable credit can be transferred once; the second beneficiary cannot transfer it again.

Why intermediaries want it: it lets a trader without capital pay the real supplier from the buyer's credit.

Why buyers resist: it confirms there is a middle party, and some buyers or their banks won't issue one.

When the credit is not transferable

• Back-to-back credit. The trader uses the buyer's credit as security to get their own bank to issue a second credit to the supplier. Needs a bank relationship and usually some collateral.
• Assignment of proceeds. The trader instructs the bank to pay part of the proceeds directly to the supplier. The supplier gets an assurance of payment, though not the full protection of a credit.
• Direct contract. The buyer contracts with the producer, and the intermediary is paid a commission under an IMFPA. Often simplest. See commission and broker fees.

Common problems

• Discrepancies. A misspelled name or a late document can delay payment. Keep the list of required documents short and achievable.
• Fake instruments. A screenshot of an MT700 or MT760 sent by email is not a credit. Real credits arrive bank to bank. See bank letters.
• Costs. Issuing, confirming and transferring a credit all cost money. Agree in the contract who pays which charges.