Back-To-Back Letter of Credit

A letter of credit that is issued on the strength of another letter of credit. An intermediary or agent of the buyer will use the first letter of credit as collateral to induce the issuance of a second credit. The second credit is used to purchase the merchandise that the seller has contracted to sell to the overseas buyer. Both letters of credit usually have the same documentary requirements, with the exception of prices. The difference in price represents the first beneficiary’s profit.