Back-To-Back Letters Of Credit

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DEFINITION of 'Back-To-Back Letters Of Credit'

Two letters of credit (LCs) used together to help a seller finance the purchase of equipment or services from a subcontractor. With the original LC from the buyer's bank in place, the seller goes to his own bank and has a second LC issued, with the subcontractor as beneficiary. The subcontractor is thus ensured of payment upon fulfilling the terms of the contract.

INVESTOPEDIA EXPLAINS 'Back-To-Back Letters Of Credit'

Like most LCs, back-to-back LCs are used primarily in international transactions, with the first LC serving as collateral for the second.

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