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.
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