6. Back-to-Back Letter of Credit
- Back-to-Back Letters of Credit are suitable for triangle trade. Triangle trade is a trade where a middleman located between the buyer (importer) and the seller (exporter).
- There are two separate letters of credit exist in a back-to-back letter of credit transaction.
- Buyer issues 1st. letter of credit in favor of the middleman middleman.
- Middleman issues 2nd. letter of credit in favor of the ultimate supplier of the goods.
- As back-to-back letters of credit contain two independent credits, issuing bank of the 2nd letter of credit has to bear substantial amount of payment risk. For this reason back-to-back letters of credit are rarely used in international trade.
