What is the process of back to back LC?
The broker asks his bank to issue another letter of credit to the actual supplier, keeping the first one as collateral. This letter of credit is known as the back to back LC. The supplier transports the cargo to the original buyer and submits the documents of transport like the bill of lading, etc. to its bank.
What is back to back LC in garments?
The Back to Back Letter of credit is a credit issued by the bank based on another original credit (i.e. Master L/C) in favor of a new beneficiary. Master LC beneficiary is to procure raw materials or the goods specified in the credit from another supplier or manufacturer by opening a new LC.
How many beneficiaries can be there in case of a back to back LC?
The LC can be transferred to more than one second beneficiary provided LC permits partial shipment and aggregate value of amounts so transferred does not exceed value of original LC.
How does a transferable letter of credit work?
A transferable letter of credit is a type of financial guarantee, known as a letter of credit, that additionally allows the first beneficiary to transfer some or all of the credit to another party, which creates a secondary beneficiary. A transferable letter of credit is an alternative option to advance payments.
What is back to back LC with example?
A back-to-back letter of credit involves two letters of credit to secure financing for a single transaction. These are usually used in a transactions involving an intermediary between the buyer and seller. Back-to-back letters of credit are used primarily in international transactions.
What is the difference between transferable back to back LC?
In a transferable LC middleman only gets “profit” and no debit is made to his account and hence no impact on his cash flow whereas in Back-to-Back LC the middleman is applicant and beneficiary of first credit and the hence the transaction will move through his account.
What is the difference between transferable back-to-back LC?
What Cannot be changed while transferring LC?
A transferred LC cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. You can only transfer an amount that is less than or equal to the amount available under the original LC. An Import LC can be transferred only if the Applicant and Beneficiary are customers of your bank.
What is meant by back to back LC?
Who can open back to back LC?
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.
Can an LC be transferred twice?
Can the transferred Letter of Credit be further transferred again? No, it can only be transferred to one or more second beneficiary, but cannot be further transferred.
Can we discount Transferable LC?
Any or all of the above may be reduced in the transferred credit to the second Beneficiary. If all or part of the LC is transferred, the first Beneficiary retains the right to substitute their own drafts and invoices for those of the second Beneficiary, if they so require.
Why back to back LC is important?
Back-to-Back Letter of Credit facilitates payments to subcontractors. The first beneficiary can transfer the LC in the favor of the secondary beneficiary, assuring payment to the supplier. This helps the business to continue its functions smoothly.
What is difference between LC and bank guarantee?
A Bank Guarantee is similar to a Letter of credit in that they both instil confidence in the transaction and participating parties. However the main difference is that Letters of Credit ensure that a transaction goes ahead, whereas a Bank Guarantee reduces any loss incurred if the transaction does not go to plan.
What is BG limit?
A bank guarantee refers to a promise provided by a bank or any other financial institution that if a certain borrower fails to pay a loan, then the bank or the financial institution will take care of the losses.
What is the difference between BG and LC?
What is the difference between BG and LC? As per Letter of Credit, once the obligation on production of documents on fulfillment of contract, the bank pays amount to beneficiary. However, in a bank guarantee, the beneficiary is paid on non fulfillment of obligation as per contract of BG.
How is BG limit calculated?
We can compute the LG or LC limit required to the company by dividing the annual consumption of raw material to be purchased against LC or LG and same is divided by 12 and multiplied by total time. (i.e.Monthly purchases ×total time) .
