by Tekle Sebhatu

Question:

Mr. Tekle! Happy New Year to you & your family, my name is Beldon Pay of Malaysia, just newly started in the global trade business, what i'm concern is we start as scratch & not have strong financial back-up yet, let said we just act as intermediates for the exporter/manufacturer, could you give an advise about the Back to Back L/C transaction, which bankers is popular on this service and how about the profit margin credited for us or commission credit to my account solution, i think this is most suitable way of initial trading for people like us lack of financial back-up as start.

Best Regards,

Beldon Pay

Plastomer Rawmart.

Answer:

Dear Beldon: I think using a back-to-back letter of credit can help overcome financing needs if you stipulate all the terms and conditions correctly. Some banks refuse to negotiate a back-to-back letters of credit because of the possible risk associated with back-to-back letter of credit of transaction.

Here is how a back-to-back letter of credit works: you will have two letters of credit that have identical documentary requirements and validity except for a difference in the price of product as shown by the invoice and the draft. You will surrender the first letter of credit for the bank to issue you the second letter of credit that might have different price for the product.

Another advantage to the middleman when using back-to-back is that the transaction can be arranged where the producer of the goods will not know who the final end user of the product is when a middleman is involved. This can help the intermediary reduce the risk of being circumvented by the producer and the end user in future transactions. Make sure you understand every detail of your transaction including all bank fees before considering using back-to-back letter of credit. Obviously, your profit margin will depend on the type of contribution you will make to a successful transaction. Talk to your local banker for additional information on back-to-back letters of credit.

You have also identified your company as an intermediary. Intermediaries come in all forms and shapes: Agents, distributors, wholesalers, brokers and retailers are all considered as intermediaries. Make sure that you understand the role of each of the above intermediaries and determine which one fits your financial resources and know-how.