Back – to – Back LCs and CAD: Clearing the fog for Traders

 QUESTION

Dear Mr. Old Man,

I hope you are doing well. I seek your insights on two points:

1. Regarding back-to-back Letters of Credit, I’ve understood that banks typically require collateral beyond the master LC itself, as it might not be a sufficient guarantee. However, reputable banks like UOB, DBS, and BCP Bank (Mauritius) state on their websites that the master LC can indeed back the baby LC. Please see the attached photos. Could you please clarify this apparent discrepancy based on your industry experience?
2. In a Cash Against Documents (CAD) transaction, is the buyer permitted to delay payment until the cargo reaches the port of destination, or is there a time limit for payment after the documents are presented?

Thank you for your valuable guidance.

Tengku

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ANSWER

Hi Tengku,

Thank you for your thoughtful questions. Please find my responses below:

1. Back-to-back Letters of Credit:

I’ve reviewed the DBS website regarding the issuance of various types of letters of credit, including back-to-back LCs. What DBS describes is accurate: the master export LC from the buyer’s bank can be used to support the issuance of an import LC (baby LC). The proceeds from the master LC are used to pay under the baby LC.

However, it’s important to understand that this is a general product description. In practice, for a bank to issue a baby LC backed by a master LC, the intermediary trader must meet other credit conditions. The bank will typically consider issuing the baby LC if the trader has a good credit standing, a sound financial profile, and — most critically — the ability to reimburse the bank in the event that the master LC is not honored (e.g., due to discrepancies or other issues).

In other words, while the master LC may serve as a form of security, it is not always sufficient on its own. A zero-capital trader (an intermediary with no financial backing) may not be approved by the bank due to the risk that the master LC payment might fail, leaving the bank exposed.

2. Cash Against Documents (CAD):

I understand you’re referring to a Documentary Collection under the Documents Against Payment (D/P) term, as outlined in the Uniform Rules for Collections (URC).

In practice, even when the collecting bank notifies the buyer of the arrival of documents, the buyer may delay payment — especially if the goods have not yet arrived at the port of discharge. Buyers often prefer to wait until they are certain the cargo has arrived before making payment and collecting the documents.

To manage this situation, sellers sometimes accept D/A (Documents Against Acceptance) terms, such as 30 or 45 days, depending on transit time. Alternatively, D/P terms with a deferred payment period (e.g., “D/P at 30 days after B/L date”) may be used.

That said, URC does not explicitly permit the buyer to delay payment until cargo arrival. Under D/P or CAD terms, if the buyer wants to obtain the documents to take delivery of the goods, they must pay immediately upon presentation.

I hope this clarifies your questions.

Best regards,

Mr. Old Man