Back-to-Back Letter of Credit

Back-to-Back Letter of Credit :

Although not recorded on a letter of credit, “back-to-back” is a term used in transactions involving two irrevocable letters of credit.

Such transactions originate when a seller receives a letter of credit covering goods which must be obtained from a third party who in turn requires a letter of credit. The “second” issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit.

The difference between back-to-back letters of credit and transferable letters of credit, is such that in a transferable letter of credit, the rights under the existing letter of credit are transferred. In a back-to-back transaction, different letters of credit are actually issued. Because technical problems can arise in back-to-back transactions, banks tend to discourage their use.

Back-to-Back Letter of Credit