Back-to-Back letters of credit are used when one letter of credit is used as security to establish another. A letter of credit offers security for both the importer and the exporter by transferring the risk to the bank. The exporter transfers the risk of non-payment as a letter of credit effectively secures payment for the exporter providing they present the correct documentation. The importer is protected because they can tie payment to exact specifications and delivery criteria therefore removing the risk of the order being delivered incorrectly.

A Back-to-Back letter of credit is particularly useful to manufacturers who act as middlemen. Say for example you were importing materials from Company A. You might have a letter of credit between you so that the exporter was happy they would be paid and you're happy that the materials would be delivered to a certain specification. You may also need Company B to start work on another part of the process but don't have the money to fund that so you could take out another letter of credit using the first as collateral. Company B would then have some guarantee that they would be paid further down the track and would commence work.

Ideal for:
Businesses that are buying goods from one place and selling them on to another or having addition work done elsewhere in the manufacturing process but don't wish to outlay the money until the work is done or goods delivered.

Security required:
The initial letter of credit acts as security for the second.

Advantages:

Disadvantages

• Can be an expensive line of credit
• Banks are often reluctant to issue Back-to-Back letters of credit because of the increased risk with multiple parties.
• Are commonly used in scams so the banks can be wary

Key UK Providers

• Some High Street Banks
• Specialist Lenders