What is a Back to Back letter of credit?
The Back to Back letter of credit is a secondary letter of credit that can be used finance a transaction. The Back to Back LC is opened taking reference from an Export letter of credit (Export LC) or Master letter of credit (Master LC).
The value of a Back to Back LC should be at least 75% of the Free On Board value of the shipment. It hence follows that more than 1 Back to Back LC can be opened against a single Export LC. The period of validity for the Back to Back LC has to be lesser than the Export LC.
What are the main difference between an Export LC and Back to Back LC?
|Difference||Export LC||Back to Back LC|
|Preparation||Buyer open the LC||Exporter opens the LC|
|Type of LC||Original or Master LC||Secondary or Subsidiary LC|
|Issuing Bank||Importer’s bank||Exporter’s bank|
|Intent||To collect finished goods||To collect raw materials|
A Back to Back Letter of Credit Example
A manufacturer in Singapore may receive an order to supply 1000 gloves to a buyer in India. The buyer in India provides the manufacturer in Singapore with a letter of credit to guarantee payment. However, the manufacturer in Singapore may not have enough raw materials and other resources to manufacturer the gloves. The manufacturer knows that he/she has to procure raw materials from Malaysia. The manufacturer in Singapore can use the LC from the buyer in India to open a Back to Back LC to the benefit of the raw material supplier in Malaysia.
A final point…
The Back to Back Letter of Credit can be used for both cross border transactions and in-country transactions. When used for cross border transactions, other transport documents will have to be carefully prepared in order to ensure that the bank is willing to release payment when delivery conditions are met.