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What is a back-to-back letter of credit? Know meaning, uses, benefits, and examples
A back-to-back letter of credit means that two letters of credit will be raised for a single transaction. Learn more about its terms, working, and benefits in the blog.
Indian exporters play a crucial role in connecting overseas buyers with local suppliers, ensuring smooth trade and reliable transactions. A back-to-back letter of credit (LC) provides an effective way to strengthen trust and manage cash flow. Understanding how a back-to-back letter of credit (LC) works can empower traders in India’s export sector to confidently handle complex international deals.
This blog explains the what a back-to-back LC is, outlines its functions, and highlights advantages, risks, and distinctions from related instruments.
This blog explains the what a back-to-back LC is, outlines its functions, and highlights advantages, risks, and distinctions from related instruments.
What is a back-to-back letter of credit?
A back-to-back LC means that two letters of credit will be raised to finance a single transaction. It is usually opted for in cases where there is a broker, agent, or intermediary involved in the process between the importer and exporter. It is primarily used for international transactions where goods are expected to be shipped from one country to another.1
How does a back-to-back LC work?
A back-to-back LC means using two letters of credit for one overall transaction. The first LC, called the “master” or “principal” LC, is issued by the buyer’s bank to an intermediary (like a broker or agent), and the second LC is issued by the intermediary’s bank to the actual supplier, using the first LC as collateral.
This setup is especially useful when the intermediary does not want to reveal the supplier to the buyer (or vice versa) or lacks sufficient credit to finance the purchase themselves.2
This setup is especially useful when the intermediary does not want to reveal the supplier to the buyer (or vice versa) or lacks sufficient credit to finance the purchase themselves.2
Steps in a back-to-back LC process:
Step 1:
Buyer arranges a master LC at their bank in favor of the intermediary (agent, broker, or trader).
Step 2
The intermediary submits this LC as collateral to their own bank and requests issuance of a second LC, known as the back-to-back LC, for the supplier.
Step 3
The supplier ships the goods and presents the necessary documents (like a bill of lading) to their bank.
Step 4
The supplier’s bank checks the documents and sends them (typically via the intermediary’s bank) to the buyer’s bank for review.
Step 5
After verifying compliance, funds are released in accordance with LC terms, first to the supplier, then to the intermediary.
Step 6
The buyer pays their bank upon receiving goods, closing the loop.3
Terms and conditions under back-to-back LC
Back-to-back LCs involve strict terms to minimize confusion and disputes. For Indian exporters and intermediaries, understanding these conditions is vital. They include:
● The intermediary (beneficiary of the master LC) requests their bank to issue the back-to-back LC.
● The value of the back-to-back LC is typically up to 90% of the master LC value. The difference reflects the intermediary’s margin.
● Both LCs must have aligned details: product description, quantity, quality, shipment terms, payment conditions, and compliance documents.
● The expiry and settlement dates for the back-to-back LC should always precede those of the master LC, ensuring the intermediary receives payment in time for onward settlement.
● Any discrepancy or mismatch between the two LCs can cause payment delays or loss.4
Benefits of a back-to-back letter of credit
Using a back-to-back LC offers unique benefits to Indian exporters and intermediaries beyond a typical LC:
1. Reduced financial complexities:
If executed appropriately, back-to-back LCs can reduce financial complexities in international trade. It allows exporters to finance raw material purchases using non-funded bank limits, conserving capital and minimizing balance sheet impact.
2. Flexibility:
Since agents often lack access to direct credit facilities, back-to-back LCs make the process more flexible.
3. Trading opportunities:
The use of a back-to-back LC offers better trading opportunities to middlemen. The credit record of the primary importer is tapped to generate secondary credit by the agents.
4. Risk mitigation:
Back-to-back LCs facilitate cross-border transactions while reducing exposure to country-specific risks.5
Contents in a back-to-back LC
The back-to-back LC mirrors the structure of a standard commercial letter of credit and contains several key components essential for clarity and enforceability. It includes:
● Beneficiary details
● Supplier’s bank details
● Amount of the order
● Document list
● Payment period for compensating the bank
● Payment mode
● Description of the goods
● Notifying address
● Confirmation order by the local bank6
● Supplier’s bank details
● Amount of the order
● Document list
● Payment period for compensating the bank
● Payment mode
● Description of the goods
● Notifying address
● Confirmation order by the local bank6
Example of a back-to-back letter of credit transaction
Imagine an Indian intermediary called Global Traders, contracts to sell spices to a US buyer. Since they don’t produce the spices, they find a supplier in Kerala, Spice Exports.
● Master LC: The US buyer’s bank issues a $100,000 master LC to Global Traders.
● Back-to-back LC: Global Traders uses this master LC as collateral to have their bank issue a second LC for $90,000 to Spice Exports. The $10,000 difference is Global Traders’ profit. The second LC has earlier shipment and expiry dates.
● Shipment and settlement: Spice Exports ships the goods, presents the documents to their bank, and is paid $90,000. Their bank forwards the documents to Global Traders’ bank, which then pays itself from the master LC and credits the $10,000 profit to Global Traders. Finally, the documents are sent to the US buyer’s bank, which releases the payment under the master LC.7
What are the risks under a back-to-back LC?
Despite its advantages, a back-to-back LC includes some risks, such as:
Settlement date of principal LC
There is a possibility that the payment date in the principal LC does not include a buffer period. In case of a delay with documents from the agent’s bank, the principal LC can expire, making the settlement process tricky.
Terms and conditions
With more parties and financial institutions involved, the terms and conditions for the primary and secondary LC can vary from each other. This can lead to differences in understanding and execution of the deal, which can make the settlement difficult.8
Differences between back-to-back LC and transferable LC
Feature
Back-to-back LC
Transferable LC
Structure
Two separate LCs (master and back-to-back)
Single LC, rights transferred to another party
Typical use
Intermediary arranges supplier payment
Intermediary transfers benefit to supplier directly
Number of LCs
Two
One
Transfer mechanism
Second LC based on the first as collateral
Original LC split, part or whole transferred
Flexibility
More flexibility as it allows distinct terms for each party
Less flexibility as all terms must align9
Conclusion
The back-to-back letter of credit can be a strategic tool for Indian exporters and intermediaries venturing into global trade, enabling secure, efficient, and trust-based cross-border transactions. By understanding what a back-to-back letter of credit is, how it works, and its key benefits and risks, businesses can confidently pursue new overseas opportunities, minimize payment risks, and build resilient supply chains.
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Frequently Asked Questions
1. How is an irrevocable LC different from a back-to-back LC?
An irrevocable letter of credit cannot be canceled or amended without the consent of all parties concerned. A back-to-back LC can be changed or amended without the consent of all parties concerned.
2. What is a back-to-back transaction?
A back-to-back transaction is a type of sub-sale in which the agent or intermediary buys goods from the exporter and sells it to the primary importer on the same day or in a few days.
3. Who opens a back-to-back LC?
The agent, broker, or intermediary can open a back-to-back LC.
4. What are the risks of a back-to-back letter of credit?
The main risks include expiry mismatches between the master and back-to-back LCs and discrepancies in terms or documentation that can delay or block payment.
5. In what type of transactions are back-to-back LCs used?
They are used when an intermediary facilitates trade — importing from one party and exporting to another — with differing contract terms that require separate LCs for payment security.
Published on November 30, 2022.
Updated on October 6, 2025.
Sources:
1. https://www.investopedia.com/terms/b/back-to-back-letters-of-credit.asp
2. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
3. https://www.dripcapital.com/en-in/resources/finance-guides/back-to-back-letter-of-credit-lc
4. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
5. https://www.axisbank.com/corporate/transaction-banking/trade-finance/back-to-back-letter-of-credit
6. https://www.wallstreetmojo.com/back-to-back-letter-of-credit/
7. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
8. https://www.dripcapital.com/en-in/resources/finance-guides/back-to-back-letter-of-credit-lc
9. https://dokasaas-support.surecomp.com/hc/en-us/articles/7309659241233-Difference-Between-Transferable-LC-and-Back-to-Back-LC
Updated on October 6, 2025.
Sources:
1. https://www.investopedia.com/terms/b/back-to-back-letters-of-credit.asp
2. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
3. https://www.dripcapital.com/en-in/resources/finance-guides/back-to-back-letter-of-credit-lc
4. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
5. https://www.axisbank.com/corporate/transaction-banking/trade-finance/back-to-back-letter-of-credit
6. https://www.wallstreetmojo.com/back-to-back-letter-of-credit/
7. https://www.credlix.com/blogs/the-intricacies-of-back-to-back-letters-of-credit-a-comprehensive-overview
8. https://www.dripcapital.com/en-in/resources/finance-guides/back-to-back-letter-of-credit-lc
9. https://dokasaas-support.surecomp.com/hc/en-us/articles/7309659241233-Difference-Between-Transferable-LC-and-Back-to-Back-LC
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