Back-to-back letters of credit

Arrangement used by intermediaries to give payment security to their suppliers.

The beneficiary of one L/C (prime or 'master' letter of credit) offers this as security for the issue of a further L/C (second or 'slave' letter of credit) in favour of the supplier of the goods.

The bank issuing the second L/C (usually Advising bank to the prime L/C) is called the second Issuing bank.

Regarded by many banks as risky - if the prime L/C runs into problems, it will no longer serve as security for the second L/C.

Bank guarantee

Undertaking given by a bank on behalf of a customer to pay the guaranteed party a sum of money if the customer cannot or will not pay.

(Not to be confused with the payment undertaking given under a letter of credit).

Banker's draft

A payment instrument used to make international payments.

A bill of exchange drawn on a bank.

Beneficiary

In a letter of credit, the party to whom payment will be made.

Normally the seller or exporter.

Bill of exchange

The most commonly-used financial instrument in international trade.

An unconditional payment demand for a specific sum of money, payable either at sight or at a specified future date (term or tenor bill). Drawn up by the seller and presented to the buyer.

Also known as a draft.

Bill of lading

Transport document issued by the carrier. Serves as:

• a receipt for goods taken in charge
• evidence of the carriage contract
• a document of title - if appropriately drawn up, can allow bearer to claim the goods.

Blank endorsement

The method whereby a bill of lading is made into a freely negotiable document of title.

Any bearer of a blank endorsed bill of lading has title to the goods and may claim them from the carrier.

Insurance documents can also be blank endorsed, so that any party can make a claim if necessary.