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