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Back-to-Back Letter of Credit

what is a back to back letter of credit

Not enough money for an import letter of credit? Back to Back Letter of Credit can be another alternative!

Back to back letter of credit is a letter of credit (second letter of credit) issued on the basis of an already existing letter of credit (first letter of credit). Generally, the beneficiary on the first letter of credit is the applicant for the second letter of credit: end-buyer opens the first L/C in favour of the bank’s client (middleman) and the bank’s client (middleman) opens the second L/C in favour of the seller /supplier. This is an arrangement in which one L/C serves as the collateral for another (the purpose of structuring the credits in this manner is to secure the payment to be made under the second L/C with the payment made under the first L/C). Under the back-to-back arrangement,

the client’s working capital is not tied up and remains available for other business opportunities and the client (acting as a middleman) is in a position to transact a sizeable deal.

Back to back letter of credit proves effective if the middleman does not want the supplier to know who the end-buyer is and vice versa. In this case, the terms and conditions of the credit issued in the middleman’s favour can be ‘transferred’ to the credit issued by the middleman in the name of the third party to the transaction. In doing so, the both credits will be performed independently, while their terms and conditions may differ significantly, if necessary.

Please note that in addition to fees below, this service is subject to certain fees relating to letters of credit. For more information, please contact your private banker.

Category: Credit

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