Topic Overview
- Back to Back letter of credit is opened against Export Letter of Credit
- This Letter of Credit consists of two letter of credit.One is Master LC and another is Back to Back LC itself
- BTB LC is opened to procure Raw Materials and other accessories to manufacture the products of Export LC
- Bank Provides 75% to 100% finance of Export LC value
Definition of Back to Back LC
Back to back Letter of Credit is one type of specialized types of letter of credit which is opened against Export LC received from the buyer. This Export LC sometimes called as Master LC. This LC consists of two letter of credit one is Master LC/Export LC and another is Back to Back LC to finance a transaction.
This LC is opened to procure the raw materials of finished goods and the quality of product must be complied with the requirements of buyer. An exporter can open a Back to Back LC 75% to 100% of FOB value of the Export LC and the payments of back to back LC is adjusted when the export proceeds is received. A company can open more than one Back to Back import LC against one or more Export LC.
Back to letter of Credit is a secondary letter of credit open by a bank on behalf of the beneficiary(exporter) against Original Export LC. This type of letter of credit is opened to supplier located inside or outside the beneficiary’s or Exporter’s country.
When Back to Back to LC is Opened?
This letter of credit is opened when an exporter receives a letter of credit from a foreign buyer , and the exporter needed for required raw materials and accessories to manufacture the ordered product. In this respect the exporter consider for opening a Back to back LC instead of opening a Cash LC to import the required raw materials Export LC. The Supplier may not supply these goods unless the payments of goods are guaranteed by the bank in the form of an opening letter of credit in their favor.
Terms and Conditions of BTB LC
The terms and conditions of Master LC and Back to Back LC are almost similar except:
- The goods supplier’s name will be different (Back to Back LC’s supplier – Second Credit)
- Invoice value will be lesser than Master LC value. Usually, 75-100% of Master LC value
- The Validity of the Back to back LC is less than the Master LC. Because after receiving the goods, the ordered product mentioned in the Master LC will be manufactured.
Requirements of Bank to open a BTB LC
- Raw materials to be imported should be acceptable and should be permissible as per the laws of the country.
- Bank may take all the required forms, agreements and charge documents signed by the applicant like LC application form, Guarantee form etc.
- Bank may take ” Irrevocable Letter of Authority” from the applicant while issuing the LC.
- Bank may ask the customer to deposit the amount of LC Margin if feels necessary.
- Bank may take service charges from the applicant to open the LC.
- Correspondent charges, Telex, Courier charges may apply.
- Discrepancy Charges also may apply for documents discrepant.
Documents required to Open LC
The following documents are needed to open Back to Back LC:
- Import Registration Certificate (IRC)
- Trade License
- Tax Payers Identification Number (TIN)
- VAT Registration Certificate
- Membership Certificate from Chamber of Commerce
- Proforma Invoice/Indent
- Insurance Cover Note etc.
Difference between Master LC and Back to Back LC
| Subject | Master LC | Back to Back LC |
| Definition | Master LC is prepared by the importer/buyer to import goods from the manufacturer | Back to back LC is opened by the exporter/manufacturer to procure Raw materials for the production of exported goods. |
| Issuing Bank | Master LC is issued by the Importer’s Bank | Back to Back LC is issued by the Exporter’s bank. |
| Types of LC | This is Original LC | This is Subsidiary LC |
| Purpose | To collect/import goods from the manufacturer | To collect Raw Materials from the supplier’s |
Example of BTB LC.
Suppose, a Bangladeshi exporter received an Irrevocable LC for the supply of ready-made shirts from an American Bank on behalf of American’s importer. To manufacture the order shirts, the manufacturer doesn’t have the required raw materials to complete the order. To execute this order he has to import Raw materials from Japan. At these moments, the Bangladeshi exporter will have to open an import LC favoring the Japanese supplier to import the cloth. This LC is opened by Bangladeshi Bank keeping the Master LC in the “Back,” is called a Back to back LC.
Accounting Entries of BTB LC
| Situation | Accounting Entries |
| 1. When LC is Opened | Goods in Transit A/c Dr LC Payable A/c (LC No.) Cr |
| 2. When materials is received | Stock A/c (Related Materials) Dr Goods in Transit A/c Cr |
| 3. When LC Payment is made | LC Payable Account Dr To, Bank Account Cr |
Conclusion
Back to Back LC is one type of Import LC either in inland or in Abroad, which is opened against lien on valid Export LC. This LC reduces the fund constraints problems of the exporter by providing the opportunity to open the LC against Export LC and to pay after getting the export proceeds.