How Back-to-Back Letters of Credit Can Help Traders Close Larger Deals

Closing big deals in commodity trading is rarely about finding the right buyer and seller—it’s about making the numbers work. You might have a supplier ready to move product and a buyer eager to receive it, but without the right funding structure, the deal never gets off the ground. This is where back-to-back letters of credit (LCs) come into play.

For traders—especially those without deep capital reserves—back-to-back LCs create a way to finance transactions without tying up their own cash. They allow you to bridge the payment gap between supplier and buyer, ensuring that both parties trust the deal enough to move forward.

At Financely, we specialize in structuring back-to-back LC facilities that allow traders to secure larger contracts, scale operations, and reduce financial exposure. Let’s break down how these instruments work, when to use them, and what it takes to qualify.

What is a Back-to-Back Letter of Credit?

A back-to-back LC is essentially two linked letters of credit that allow a trader (the middleman) to buy goods from a supplier using the buyer’s LC as collateral. It’s a structured way to fund a transaction when the trader doesn’t have the capital upfront.

Here’s how it works:

1. Buyer Issues an LC to the Trader – The trader receives a letter of credit from their buyer, guaranteeing payment once the agreed shipping and quality conditions are met.
2. Trader Uses the LC to Secure a Second LC – The trader, instead of paying the supplier in cash, issues a second LC (backed by the first) in favor of the supplier.
3. Supplier Ships Goods and Presents Documents – The supplier fulfills their obligations and submits shipping documents to the bank.
4. Bank Releases Payment to the Supplier – The supplier gets paid once the documents are approved.
5. Buyer Pays the Trader – The buyer releases funds based on the original LC.
6. Trader Pays Off the First LC – The trader settles their LC with the supplier’s bank, completing the transaction.

This setup allows a trader to execute large transactions without needing to front cash, making it an essential tool in commodity trading.

Why Traders Use Back-to-Back LCs

Commodity trading moves fast, and working capital constraints can prevent even experienced traders from taking on bigger deals. A back-to-back LC allows you to leverage the buyer’s credit standing to secure the goods, ensuring that suppliers get paid without requiring your own capital upfront.

For traders who work with multiple suppliers and buyers, these instruments offer flexibility. Instead of waiting for one deal to close before starting another, you can keep transactions flowing, helping you scale operations without stretching your cash reserves too thin.

They also provide payment security. Since banks act as intermediaries, both suppliers and buyers have assurance that funds will move according to contract terms. This mitigates risks like non-payment, shipment delays, and counterparty defaults.

Industries and Products That Benefit from Back-to-Back LCs

This structure works particularly well in markets where large capital outlays are needed, but cash flow is unpredictable. Some of the industries that rely heavily on back-to-back LCs include:

• Crude Oil and Refined Petroleum Products – Diesel, Jet A1, LNG, and bitumen trades often require large cash commitments that many traders can’t cover outright.
• Metals and Minerals – Copper, aluminum, iron ore, and other bulk commodities need structured finance to manage price fluctuations and delivery timelines.
• Agricultural Commodities – Grain, sugar, coffee, and cotton traders use LCs to move product between buyers and suppliers in different jurisdictions.
• Manufactured Goods and Industrial Equipment – Traders handling machinery, auto parts, or construction materials often use back-to-back LCs to bridge supply chain financing gaps.

How Financely Structures Back-to-Back LC Transactions

At Financely, we work with commodity traders, wholesalers, and distributors to structure back-to-back LC solutions that fit their trade cycle. Our process is designed to be fast, flexible, and aligned with real-world trading conditions.

We evaluate each deal based on:

• Creditworthiness of the Buyer – The strength of the buyer’s LC plays a key role in determining terms.
• Supplier Requirements – Some suppliers may insist on confirmed LCs, while others are comfortable with standard structures.
• Trade Cycle Timing – The duration between when the supplier ships and when the buyer pays needs to be accounted for.
• Underlying Commodity and Market Conditions – Some products, such as crude oil and LNG, require additional compliance and risk mitigation strategies.

Once approved, we issue an LC to your supplier using the buyer’s LC as collateral, giving you the leverage to close deals that would otherwise be out of reach.

What You Need to Qualify

Not every trader qualifies for a back-to-back LC. Since banks and financial institutions assess risk carefully, here’s what we typically require:

• A valid purchase order (PO) from a reputable buyer – The stronger the buyer, the easier it is to secure an LC.
• A supplier willing to accept an LC structure – Some suppliers insist on cash upfront, while others are comfortable with LCs.
• Clear trade documentation – Including contracts, past deal records, and a reliable shipping plan.
• Minimal upfront capital – While an LC covers most of the deal, some initial capital is typically required.

Why Financely is the Right Partner for Back-to-Back LCs

Banks often take weeks—sometimes months—to approve LC requests, leaving traders stuck in limbo. At Financely, we move fast. We work with a network of financial institutions that understand trade finance, ensuring that you get the capital you need when you need it.

We also offer customized LC structures, meaning that whether you’re moving petroleum, metals, or grains, we tailor financing to fit your deal.

If you’re ready to secure a back-to-back LC and take on larger trade opportunities, reach out today. Let’s structure a financing solution that works for your business.