Letters of Credit

Letters of credit are frequently used in international trade. Offshore Pro Group can help set up offshore company structures and open bank accounts for those offshore companies, in such a way that they can be used for international commercial transactions.

Types of Letters of Credit

A letter of credit is a document issued by a bank assuring payment to a seller of goods and/or services, provided certain documents are presented. To receive payment of a Letter of Credit, the exporter or shipper must present the documents required: typically, a document proving the goods were sent. Letters of credit are useful when the buyer does not want to make payment up-front for goods, but the seller is not prepared to release the goods on credit. Banks become involved in the transaction and this results in a guarantee to both parties that they will not lose money on the transaction.

Back-to-Back Letters of Credit

In a typical case, an offshore company acts as an intermediary, buying goods from one party and selling them to another. The offshore company in the middle sets up the deal but may not have the resources available to complete the deal with its own funds.

A Back-to-Back Letter of Credit arrangement serves to allow the offshore company to buy goods from the seller, then re-sell them to the ultimate buyer, without having to use its own funds. Effectively one irrevocable letter of credit serves as collateral for another: the advising bank of the first letter of credit becomes the issuing bank of the second letter of credit.

Unlike in the case of a transferable letter of credit, permission of the ultimate buyer (the applicant or account party of the first letter of credit) or that of the issuing bank, is not required in a back-to-back letter of credit. This way the intermediary is able to hide from the buyer the identity of the seller.

Banks That Will Issue Back-to-Back Letters of Credit to Offshore Companies

Offshore Pro Group is able to provide as a standard service complete structuring of an offshore intermediary company together with a bank account that will allow for Back-to-Back Letters of Credit. Since one LC serves as collateral for the other, there is no credit risk to the bank. However, many offshore banks specialise in private wealth management and do not have the expertise to carry out such transactions smoothly.

We therefore work with a couple of banks in EU countries that have specialist knowledge and expertise in issuing back-to-back LCs for offshore companies. One has particular expertise in Russia/CIS business, the other in Middle East and Africa. Both are fully accustomed to trade with China. We also work with a major bank in Panama that has experience of trade operations between the Americas and China.

Letters of Credit from Top 10 World Banks or Top 25 World Banks

Clients often request that LCs are issued by one of the Top 10 World Banks or one of the Top 25 World Banks. A misunderstanding often occurs here. If the seller is not sure of the credit-worthiness of the buyer’s bank, the solution is that the LC should be confirmed or guaranteed by one of the top world banks.

Unless your business is extremely large, most of the major world banks do not want to open accounts for small offshore intermediary companies. Even if you do succeed in getting an account opened, then your business will be regarded as small and you will not receive a good level of service. We therefore advise clients to work with the smaller, specialist banks we recommend that will value your business more and will assign experienced staff to give you a fast and efficient service. These banks in turn are absolutely accustomed to requests to have their LCs confirmed by larger world prime banks, so they arrange the confirmation routinely.

Account Opening Procedure

First of all it is necessary to set up the company itself and a regular bank account, so the bank has the due diligence already taken care of. This process can take a few weeks so it is best to get it done in advance of negotiating the first actual intermediary transaction. Then, we can then introduce you directly to the Manager of the International Trade Department of the bank.

We can open accounts at these international trade banks for companies from all jurisdictions we work with.

Please contact Offshore Pro Group to start the process.