Difference between Master L/C and Back to Back L/C

By | August 6, 2015

Difference between Master L/C and Back to Back L/C

Mayedul Islam
Merchandiser at Fashion Xpress Buying House.
Badda, Dhaka, Bangladesh.
Email: [email protected]

 

Letter of Credit (L/C):

L/C means letter of credit. The technical term for letter of credit is ‘Documentary credit’. It is a common word for merchandisers in apparel merchandising. L/C is a payment term generally used for international sales transactions. It should be mentioned that L/C deals only in documents but not goods. L/C works in favor of both of the Buyer and seller. The bank that issues the L/C is termed as Issued bank or Buyer’s bank. The bank which advice the L/C to the seller is called Advising bank or Seller’s bank.

L/C for Garments

L/C for Garments

There are mainly two types L/C. these are-

  1. Master L/C,
  2. Back to back L/C.

Both of those are described in the below:

1. Master L/C:

When a L/C is opened to import goods directly from the exporter is called master L/C. This L/C is issued by the buyer (Buyer’s bank) to manufacturer. Master LC has higher financial value than back to back L/C.

2. Back to Back L/C:

When a L/C is prepared by the manufacturer to collect raw materials for production from the suppliers is called Back to Back L/C. Back to Back L/C has 70-80% financial value of master LCs.

Difference between Master L/C and Back to Back L/C:

SL No.
Subject
Master L/C
Back to Back L/C
01
Definition
This type of L/C is prepared by the buyer to import goods from the manufacturer.
This type of L/C is prepared by the manufacturer to collect raw materials from raw materials supplier for the production.
02
Issued Bank
Issued by the buyer’s bank.
Issued by the manufacturer’s bank.
03
Types of L/C
It is a basic L/C.
It depends on master L/C
04
Purpose
To import goods from the manufacturer.
To collect raw materials from the Raw material suppliers.
05
Financial Value
It has higher financial value than Back to Back L/C.
It has lower financial value than master L/C.

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5 thoughts on “Difference between Master L/C and Back to Back L/C

  1. Fabbriclass

    Good article and more informative. I want to add another important point.

    Collateral or security kept against master LC is cash margin or any property while in back to back LC, collateral will be master LC and master LC should have a clause, to negotiate, kept as collateral, in LC document

    Reply
  2. Muhammad Ikramullah Sayeed

    Hi,
    I like this article for it simplicity and informative nature.
    Thanks a lot.

    With regards,

    Reply
  3. xia

    Master LC opened to other customer out of Bangladesh, transferred to Bangladesh buying house, endorsed for commission and Back to Back LC is opened for fabrics & Trims. Is this legal as per Bangladesh Bank laws?

    This is money of Bangladesh manufacturing Factory ,Buying office commission is endorsed in any case

    Reply

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