BACK TO BACK CREDIT Meaning and
Definition
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Back to back credit refers to a financing arrangement in which a bank or financial institution extends credit to a borrower, backed by a corresponding credit facility obtained from another lender. This type of credit facility is commonly used in international trade transactions, particularly in cases where a buyer seeks to purchase goods or obtain services from a third party, but lacks the necessary funds or creditworthiness to do so.
In a back to back credit transaction, the buyer's bank acts as the intermediary between the buyer and the seller. The bank issues a letter of credit (LC) to the seller, guaranteeing payment upon the satisfactory delivery of goods or completion of services. Simultaneously, the buyer enters into an agreement with the bank to obtain credit based on the LC. The bank acts as the financier by providing the required funds to the buyer, which are directly used to pay the seller upon completion of the transaction.
This arrangement minimizes the risk for both parties involved. The seller receives assurance of payment from a reputable financial institution, while the buyer gains access to credit without having to demonstrate their creditworthiness directly. Moreover, it allows businesses to engage in trade transactions even if they lack sufficient working capital or credit history.
Overall, back to back credit facilitates international trade by providing a secure and efficient mechanism for parties to engage in transactions, enabling them to overcome financial obstacles and expand their business activities.
