Most traders are aware of Letters of Credit (LCs) and how to use them. However, a lesser-known financial instrument called Back to Back Letters of Credit is not used as commonly. A Back to Back LC is defined as an arrangement under which a buyer provides a letter of credit to the supplier, and in return, the supplier also obtains a letter of credit for the buyer. The main reason behind using Back to Back LCs is that it mitigates the risk for both parties and accelerates the transaction. This article will focus on understanding Back to Back LCs and how these can be used in order to simplify international trade.
Goods are imported and exported all around the world. In order to make the process smoother and to reduce the risks involved, traders can use financial instruments. Some examples of financial instruments include LCs and Bank Guarantees. Traditional LCs can benefit traders who are looking to trade with another party for the first time. However, LCs typically provide protection to only one of the two parties. This is where Back to Back LCs can be more beneficial. Traders who are looking to minimise their trade risk can make use of Back to Back LCs. Such instruments allow both traders to secure their interests. Back to Back LCs comprise of two elements, the Master LC and the Back to Back LC. Both of these are used to facilitate the transaction.
Traders and intermediaries who are looking to insulate their transactions can use Back to Back LCs. Such LCs are extremely easy to coordinate. This is because of two major reasons. Firstly, both the LCs are very similar in nature as they both correspond to the same trade. Secondly, both these LCs are issued by the same financial institution, which makes it easier to coordinate and execute them. The only major differences between the Back to Back LCs are the credit amount and the unit price, and the expiry dates and shipment dates. Further, it is also important to schedule the Back to Back LCs in such a manner that sufficient time is provided to both parties.
There are multiple benefits of Back to Back LCs. Firstly, these financial instruments minimise the credit risk for the supplier as well as the buyer. Secondly, this type of LCs can also speed up the cash flow. Since both parties are well insured, the transaction can take place in a smooth manner. Thirdly, such financial instruments can help the buyer and seller in hiding the name of the supplier and the price. Thus, Back to Back LCs have multiple advantages for all parties and can act as facilitators of international trade.
Obtaining a Back to Back LC can be a complicated task. This is because of two major reasons. Firstly, most banks in countries like the US want traders to have a line of credit in place. Not all traders have ready access to lines of credit. Secondly, banks are reluctant in terms of relying on an LC as a source of funding. This is because the perceived risk for the bank is too high. Therefore, finding a Back to Back LC arrangement is not a straightforward task for traders.
This is where financial institutions such as Euro Exim Bank can step in. Euro Exim Bank can provide you with a range of financial instruments that could smoothen your trade. Euro Exim Bank offers Back to Back LCs that could reduce the risks associated with your imports and exports, while also speeding up the process. Euro Exim Bank offers a hassle-free experience that will help you in completing your international trade without any hurdles. More information about Euro Exim Bank and its offerings can be accessed here.