How to Use Back-to-Back Letters of Credit for International Trade Deals
How to Use Back-to-Back Letters of Credit for International Trade Deals
Why Back-to-Back LCs Matter for Intermediaries
Trading houses and brokers thrive on thin margins and swift turn-arounds. A single late payment can choke cash-flow and torch credibility. Back-to-Back Letters of Credit (LCs) plug that gap by chaining two guarantees—one from the buyer, one to the supplier—so you move goods without stumping up your own capital.
1. What Is a Back-to-Back Letter of Credit?
Two separate but linked LCs:
- Master LC — Issued by the buyer’s bank in your favour.
- Secondary LC — Issued by your bank in the supplier’s favour, mirroring the first LC’s key terms.
The match-up keeps everyone honest: you get buyer credit support; the supplier sees a bank guarantee; the banks release funds only when documents line up.
2. Workflow: Five Steps from Order to Payment
1. Buyer Issues Master LC
Buyer’s bank locks in amount, tenor, and doc list for you.
2. You Issue Secondary LC
Your bank mirrors terms (often 95–100 % value) to supplier.
3. Supplier Ships Goods
Clean documents under Secondary LC—BL, invoice, insurance.
4. Docs Flipped under Master LC
You present supplier docs (plus your invoice) to buyer’s bank.
5. Dual Payment Release
Banks pay supplier and you—deal closes, margin in pocket.
3. Key Benefits at a Glance
Risk Mitigation
Banks, not counterparties, shoulder payment and performance risk.
Capital-Light
Fund shipments off buyer credit instead of tapping your cash.
Supplier Confidentiality
Buyer never sees your source list or true cost base.
SME Access
Open global lanes even on modest balance-sheets.
4. Example: U.S. Trader, EU Buyer, China Supplier
- French buyer issues a $2 m Master LC to the U.S. intermediary.
- Intermediary’s bank turns around a $1.9 m Secondary LC to the Shenzhen supplier.
- Supplier ships 10 000 units and forwards compliant docs.
- Intermediary flips docs under Master LC; buyer’s bank honours.
- Margin (≈$100 k) arrives without tying up the intermediary’s own cash.
5. Back-to-Back vs Transferable LC
| Aspect | Back-to-Back LC | Transferable LC |
|---|---|---|
| Number of LCs | Two linked instruments | Single LC |
| Flexibility | Highly customisable terms | Limited to original LC wording |
| Supplier Privacy | Buyer can’t see supplier | Supplier often disclosed |
| Ideal Use | Complex, high-value chains | Straightforward trades |
6. Challenges & Mitigations
Credit Risk
Your bank faces supplier claim first—choose AA/A banks to reassure buyer.
Complex Docs
Two sets of paperwork invites errors. Use a trade-finance adviser for pre-checks.
Double Fees
Pay issuance & confirmation twice. Negotiate package pricing with banks.
7. How Financely Makes It Easy
- Bank Bidding: We pit multiple issuing and confirming banks against each other to shave basis points.
- Document Polish: Our team screens every draft—zero discrepancies, zero delays.
- Risk Shields: FX hedges, cargo insurance, and compliance checks baked in.
Ready to Launch a Back-to-Back LC?
Secure supplier confidence, protect your margin, and keep working capital free. Click below for a personalised quote and workflow map.
Request a QuoteFinal Takeaway
Back-to-Back LCs let intermediaries run lean and global at once. Use the grids above as your quick-reference, then let Financely handle the heavy lifting—from bank negotiation to final payment release.
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