- The first half of a back to back LC process is similar to a commercial LC. The buyer goes to his bank, also known as the issuing bank, seeking an LC to send it to the broker’s bank. This letter of credit is known as the principal LC or master LC.
- The broker asks his bank to issue another letter of credit to the actual supplier, keeping the first one as collateral. This letter of credit is known as the back to back LC.
- The supplier transports the cargo to the original buyer and submits the documents of transport like the bill of lading, etc. to its bank.
- The supplier’s bank then sends the documents to the broker’s bank, which upon carefully scrutinizing the documents, makes the payment to the supplier’s bank.
- The supplier’s bank pays the supplier for the goods.
- Broker’s bank then sends the documents to the buyer’s bank. The bank scrutinizes the documents and pays the broker’s bank the amount listed in the principal LC.
- The buyer pays the buyer’s bank the money upon the delivery of goods.
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