AN INTRODUCTION OF BACK-TO-BACK LETTER OF CREDIT
A Back-to-Back Letter of Credit is an arrangement used by International Trade to facilitate the sale and import of goods, especially when the seller and buyer are located in different countries. A Back-to-Back Letter of Credit is a secondary or sub-letter of credit that can be applied in three different ways.
The first is when the seller of goods to the buyer is also the exporter from the country of origin. It is structured so that the buyers bank has a financial obligation to pay the seller/exporter. The sellers bank, often referred to as the Issuing Bank, in turn has a financial obligation to the buyer/importer.
The second occurs when the seller is not the exporter of the goods. In this case, the buyers bank issues a primary letter of credit to the seller. The seller arranges for a secondary or back-to-backletter of credit to be issued by its bank to the exporter.
The third use of a Back-to-Back Letter of Credit is when the parties are operating in the same country. In this case, the buyers bank issues a letter of credit to the sellers bank. The sellers bank then issues a letter of credit to the buyer.
Back-to-Back Letters of Credit are essential to international trade as they offer security to both the buyer and the seller, especially in situations where the parties do not know each other. The letters guarantee payment to the exporter and delivery of the goods to the importer. In the event of default, both parties are covered by the terms of the letter and the bank that issued the letter of credit.
In conclusion, Back-to-Back Letters of Credit play a vital role in international trade. They provide an extra layer of security for both the buyer and the seller by guaranteeing payment and delivery of goods in the event of default. As such, they have become an important part of cross-border trade.
