A buyer in one country wants machinery, materials or consumer goods. The supplier is elsewhere, but an intermediary has found the opportunity and does not want the buyer and supplier simply to deal directly. The question, then, is what is a back to back letter of credit? It is a banking arrangement designed for precisely this sort of transaction, though it is more demanding and less routine than the phrase may suggest.

In simple terms, an intermediary receives a letter of credit from the ultimate buyer and uses it as security to persuade a bank to issue a second letter of credit in favour of the actual supplier. There are therefore two separate credits, linked commercially but not identical in legal effect. One supports the sale to the buyer; the other supports the intermediary’s purchase from the supplier.

This device has long had a place in international trade, particularly where merchants, agents and specialist traders add genuine value through market knowledge, finance, inspection or consolidation. It is not a substitute for sound credit judgement, accurate documents or a viable contract. Indeed, it makes each of those matters more significant.

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A letter of credit can make an overseas sale bankable, but only when its terms match the way the goods are actually bought, supplied and shipped. “Transferable and divisible L/Cs explained” is therefore not merely a banking question. It concerns the practical relationship between buyer, exporter, supplier and bank – and the point at which an intermediary may be paid without exposing either party to an unnecessary risk.

The terminology is often used loosely. A transferable credit has a precise meaning under the rules normally governing documentary credits. A divisible credit, by contrast, is not generally a formal category in the same sense. People may mean that the credit can be split between suppliers, that partial shipments are permitted, or that the proceeds may be shared. Those are different arrangements, with different consequences.

Back in the 1970s, I built a business using transferable and divisible letters of credit to assemble package deals for major contractors throughout the Middle East. These included projects such as Doha General Hospital, Salmaniya Medical Centre, the Kuwait Water Towers and the Aqaba Holiday Inn, along with numerous others across the region. The contractor placed a single order with my company, and I brought together products from numerous manufacturers, arranging for them to be shipped as one consignment. Without these two ingenious banking arrangements, I simply would not have had the financial resources to undertake such contracts. They enabled a small export merchant with limited capital to compete for substantial international business that would otherwise have been beyond his reach.

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An export order can look profitable on the day it is signed and become a loss long before the goods reach their destination. This is why exporters struggle: selling abroad is not simply domestic selling with a longer delivery route. It is a chain of promises involving a buyer, banks, freight operators, insurers, officials and often agents, any one of whom can delay, alter or frustrate the transaction.

For much of my working life, export success depended less on enthusiasm for overseas markets than on patience, judgement and a willingness to ask awkward questions before accepting an order. The questions were practical. Who will pay? Under which law? Can the goods be cleared? Is the documentation exact? What happens if the issuing bank cannot honour its obligation? These matters are less glamorous than winning business, but they decide whether the business was worth winning.

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