Back-to-Back Letters of Credit - Explained
What are Back-To-Back Letters of Credit?
Written by J. Mance Gordon
Updated at April 19th, 2024
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What is a Back-to-Back Letter of Credit?
Back-to-back letters of credit are used in business transactions where an intermediary is needed between a buyer and a seller. A firm, a broker, or financial consultant will often act as an intermediary between a buyer and a seller.
A Back-to-back letter of credit is comprised of two distinct letters of credit (LCs). One is issued by the buyer's bank. The other is issued by the intermediary's bank. The buyer's bank issues the LC to the intermediary. The inetrmediary's bank gives the seller the second LC stating that it will make payment if the buyer does not.
A seller is assured to get payment once the terms of the contract are fulfilled and evidence presented to the intermediary's bank. Two letters of credit (LCs) are used in this transaction. The original and first LC is issued by the buyers bank and given to the intermediary. The intermediary takes this original LC to his bank for the issuance of the second LC in which the seller will be the beneficiary.