Demystifying Back-to-back LC


Imagine you're a baker who wants fancy ingredients from another country. But you don't have the money upfront, and the supplier wants to be paid right away. Now, imagine you also sell cakes to a fancy restaurant, and they pay you later. Back-to-back LC is like using the restaurant's payment to secure the ingredients for your bakery!

Here's how it works:

You (the baker): Ask your bank (the issuing bank) for two LCs:

A Back-to-back LC for the supplier: This guarantees the supplier gets paid quickly, like cash on delivery.

An Import LC for the restaurant: This promises the restaurant they'll get their cake order, even if you have problems with the supplier.

Your bank: Sets up these LCs with other banks. They use the restaurant's payment (from the Import LC) to fund the Back-to-back LC for the supplier. It's like borrowing from the restaurant's payment to pay the supplier.


Supplier: Gets paid immediately when you confirm the ingredients arrive.

You: Use the ingredients to bake delicious cakes and deliver them to the restaurant.

Restaurant: Pays you later, as agreed. You use this money to pay back your bank for the Back-to-back LC.

Benefits for you:

Get ingredients without own money: You use the restaurant's payment to secure the ingredients, so you don't need your own cash upfront.

Guarantee for everyone: Supplier gets paid quickly, restaurant gets their cake order, and you have time to bake and pay your bank back.

Like a financial bridge: It connects your baking business with the supplier and the restaurant, making everything smoother.

Think of it like a three-way handshake: Everyone gets what they want at the same time, thanks to the clever magic of back-to-back LCs.

In the same vein, imagine you're a middle person between two companies: one wants to sell goods to you, and you want to sell those goods to someone else. But you don't have the goods yet, and you need assurance that you'll get them.

So, you ask your bank to help. Here's how it works:

First, your bank gives a promise, called a Letter of Credit (LC), to the seller who will provide the goods to you. This promise ensures they'll get paid once they deliver the goods to you.

Now, you need to sell these goods to someone else. But since you don't have the goods yet, you can't show them to your buyer. So, you ask your bank for another promise (another LC), which is based on the first one you got from the seller. This second promise is for your buyer and ensures they'll get the goods once you receive them.

So, it's like a chain of promises: your bank promises to pay the seller once they deliver to you, and then your bank promises to pay your buyer once you receive the goods. This way, everyone feels secure in the transaction, even though you're the middle person in this deal.

I hope this simplified explanation makes sense! Don't hesitate to reach out for your Trade Finance needs.

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