Back to Back Letter of Credit

As a middleman, how can you profit from trade without disclosing the identity or details of your ultimate buyer and supplier?

Back-to-Back Letters of Credit are used in international and domestic trade. The parties to a Back-to-Back Letter of Credit are:

1. the buyer and his bank as the issuer of the original letter of credit,
2. the seller/manufacturer and his bank,
3. the manufacturer's subcontractor and his bank.

This type of credit transaction is used when a seller/manufacturer has to purchase a component or farm out part of the manufacture of a product, but may not have the cash flow to do so.

In this case, the seller/manufacturer applies to his bank for a letter of credit, identical to the original Letter of Credit he received from the Buyer, except that it is for a lesser value. This second letter of credit, called a Back-to-Back, is sent to the subcontractor's bank and therefore the subcontractor knows that he will be paid and can proceed with his part of the transaction - supplying components or service to the manufacturer.

A Back-to-back L/C safeguards your interests as a middleman by refraining from the disclosure of the identity/details of your supplier to your customers and vice versa. You simply provide us with the original L/C (called "master L/C") and we will issue another L/C involving the same lot of goods (called "baby L/C") to the supplier.