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Back-To-Back Letters Of Credit

What are 'Back-To-Back Letters Of Credit'

Back-to-back letters of credit consist of two letters of credit (LCs) used together to finance a transaction. A back-to-back LC is usually used in a transaction involving an intermediary between the buyer and seller, such as a broker, or when a seller must purchase the goods it will sell from a supplier as part of the sale to his buyer. Next Up Straight Credit Letter Of Credit Purchase-Money Mortgage Fully Funded Documentary Letter ...

Explaining 'Back-To-Back Letters Of Credit'

The back-to-back LC is actually made up of two distinct LCs, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the seller. With the original LC from the buyer's bank in place, the broker goes to his own bank and has a second LC issued, with the seller as beneficiary. The seller is thus ensured of payment upon fulfilling the terms of the contract and presenting the appropriate documentation to the intermediary's bank. In some cases, the seller may not even know who the ultimate buyer of the goods is.

Example of a Back-to-Back LC Transaction

For example, assume that Company A is in the U,S, and sells heavy machinery. Broker B, a trading firm based in London, has learned that Company C, which is located in China, wants to purchase heavy machinery and has managed to broker a deal between the two companies. Company A is eager to sell but does not want to take on the risk of default of payment by Company C. Broker B wants to ensure that the trade is made and that is receives its commission.


Further Reading


Documentary Letters of Credit, Legal Nature and Sources of Law
www.ceeol.com [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

Transfer and Assignment of Letters of Credit Under the Uniform Commercial CodeTransfer and Assignment of Letters of Credit Under the Uniform Commercial Code
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

Letters of credit and illegal contracts: the limits of the independence principleLetters of credit and illegal contracts: the limits of the independence principle
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

Irrevocable Letters of Credit and Third Party Fraud: The American AccordIrrevocable Letters of Credit and Third Party Fraud: The American Accord
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

How to Use Letters of Credit in Financing the Sale of GoodsHow to Use Letters of Credit in Financing the Sale of Goods
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

Letters of Credit in the United States Construction IndustryLetters of Credit in the United States Construction Industry
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

The Uniform Commercial Code in Minnesota: Article 5--Letters of CreditThe Uniform Commercial Code in Minnesota: Article 5--Letters of Credit
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

The content and classification of the concepts of trade finance and documentary operationsThe content and classification of the concepts of trade finance and documentary operations
www.fin-izdat.com [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …

Bank Guarantees and Letters of Credit: Time for a Return to the FoldBank Guarantees and Letters of Credit: Time for a Return to the Fold
heinonline.org [PDF]
… Credits can be used as security for other obligations like case of Back-to-Back letter of credits … Issue), 1942, p.52 [7] Kozolchyk, B. Commercial Letter of Credit in the Americas: A … 1035 (BURR 1666) [13] Mc Curdy .W, 'Commercial Letters of Credit' (1922) , Harvard Law Review …



Q&A About Back-To-Back Letters Of Credit


What is a back-to-back letter of credit?

A back-to-back letter of credit consists of two letters of credit used together to finance a transaction.

How does the letter of credit work?

The letter of credit has been used in Europe since ancient times. Letters of credits were traditionally governed by internationally recognized rules and procedures rather than by national law. The International Chamber of Commerce oversaw the preparation of the first Uniform Customs and Practice for Documentary Credits (UCP) in 1933, creating a voluntary framework for commercial banks to apply to transact business across borders.

Who oversees letters-of-credit today?

Today, there are two sets governing letters-of-credit worldwide; one set issued by ICC and another set issued by UN/CEFACT (United Nations Centre For Trade Facilitation And Electronic Business).

What does "intermediary" mean in this context?

An intermediary is someone who acts as an agent between two parties, such as Broker B acting as an agent for Company A and Company C.

Who uses back-to-back letters of credit?

Back to back letters are usually used by an intermediary between the buyer and seller, or when a seller must purchase goods as part of the sale.

Why would you use a back to back letter of credit?

To ensure that payment is made on time for goods purchased from suppliers.

What are some examples where letters of credits are used?

Letters of credits are used extensively in financing international trade when reliability cannot be readily determined between contracting parties. Its economic effect is to introduce a bank as an underwriter that assumes counterparty risk on behalf of the buyer paying seller for goods.

How does this work in practice?

Company A sells heavy machinery and wants to be sure they will get paid by Broker B who buys the machinery from them and then resells it to Company C in China.

What is a letter of credit?

A letter of credit, also known as a documentary credit or bankers commercial credit, is an economic guarantee from a bank to an exporter that the exporter will be paid for goods.

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