A letter of credit is a financial instrument issued by a bank to build trust between an importer and an exporter. It does this by guaranteeing that the seller will be paid for their goods once they have fulfilled certain pre-determined conditions. There are several types of LC and among them back to back letter of credit is perhaps the most popular within the UAE. A back to back LC is useful when there is a middle-man between the buyer and the supplier. The middle-man receives a letter of credit from the buyer’s bank, which they can use to acquire a second LC of their own. This second letter of credit ensures that the original seller receives payment for his goods.
Businesses can benefit from a back to back letter of credit as it helps them secure payment from their customers. Additionally, it will allow a seller to defer payment to their supplier until they have received payment themselves. Credico Capital has helped secure back to back LCs for numerous businesses in Dubai and across the UAE. To see if our expert financial advisers can do the same for you, contact a Credico Capital trade desk today.
A back to back letter of credit consists of two separate LCs. The first of these LCs is presented to a middle-man by the buyer. The middle-man trades this in for a back to back LC from their bank. What this allows them to do is guarantee payment to their supplier. Back to Back LCs are extremely useful during cross-border transactions, especially when the parties involved have no prior dealings together. In many cases, the original supplier will have no idea who the final buyer is.
Credico Capital is the go-to trade finance issuer of some of Dubai’s top businesses. Among the reasons you should choose us to help secure your back to back letter of credit are:
Before pursuing a back to back letter of credit, you should be confident it is the right Letter of Credit for you. Consider the following example to help you understand the concept better:
Let’s say there is a company in London which specializes in plumbing supplies (Company UK). A UAE entity (Company UAE) wishes to purchase goods from Company UK. Company UAE intends to sell these goods onwards to a company in New York (Company NY). Now let’s suppose company UK does not wish to risk a loss as a result of non-payment from Company NY. They may ask Company UAE for a letter of credit. Likewise, Company UAE may not want to risk non-payment from Company NY.
Consequently, Company UAE may ask Company NY for a letter of credit. With this letter of credit, Company UAE can secure a second LC from their bank, ensuring payment to Company UK. This process creates a back to back LC.