Back-to-Back L/C: Trading Without Working Capital

A back-to-back L/C is a second credit opened on the security of an export L/C, used by an export-oriented factory to buy raw materials, locally or abroad. Its magic: the bank needs no margin to open it (it holds the export L/C in lien instead), so a garment factory can operate without its own working capital. It's a "triangle of trust" between the factory, its material suppliers, and the bank.

How it works

1. The buyer opens an export (master) L/C in the factory's favour.
2. The factory takes that export L/C to its bank as security.
3. The bank opens a back-to-back import L/C in favour of the fabric/trim supplier, with no cash margin, keeping the export L/C in lien.
4. The factory imports raw materials, makes the garments, ships against the master L/C, and the proceeds settle the back-to-back.

The factory never has to front the raw-material cost, the export order itself is the collateral.