When a transaction takes place between a buyer and a seller keeping an intermediary in the loop, the type of LC used in such cases is known as 'Back to Back letter of credit'. It is also called as Countervailing Credit. Generally, a broker or trader acts as an intermediary between the seller and the buyer. Instead of issuing an LC to the supplier, the buyer issues it to the intermediary. The broker then submits the primary LC as collateral at a bank and asks it to issue another LC to be given to the end supplier in exchange for the shipment. The second LC that is issued keeping the primary LC as collateral is known as a 'back to back letter of credit'. Practically speaking, this credit is used when LC is opened by the ultimate importer in favour of a particular beneficiary, who may not be the actual exporter or manufacturer. It is not safe as transferable credit from the banker’s point of view.
Back-to-Back Letter of Credit is mainly needed when: (a) The ultimate importer is not prepared to open transferable credit. (b) The beneficiary is not willing to disclose the source of supply to the openers. (c) Actual manufacturers/exporters insist on payment against documents for products but the beneficiary of credit is short of funds.
Contents in a Back to Back Letter of Credit Format
A back to back LC looks just like a normal LC. The only difference is that it is issued by keeping the principal LC as its collateral. Here are some of the details that a back to back LC contains:
- Beneficiary Details
- Time validity by which the payment is to be made to the bank
- Seller's Bank Details
- Payment Mode
- List of Documents
- Notifying Address
- Description of Goods
- Confirmation Order from a local Bank