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Also known as back-to-back credit or reciprocal credit, a back-to-back guarantee is a type of standby credit that involves the arrangement of some type of security on the performance of a seller or owner while simultaneously arranging some type of guarantee on the part of the buyer. The idea behind this arrangement is to protect the interests of both parties involved in the transaction from incurring a loss, or at least minimizing that loss to a great degree. The terms of this sort of reciprocal arrangement is often documented in the body of a back-to-back letter of credit.
The creation of a back-to-back guarantee is often found when transactions involve a great deal of money. At times, this approach is utilized as part of the arrangement for an import/export deal. The approach may also be used when an asset such as commercial property is sold. As part of the guarantee arrangement, both parties are protected from unanticipated events that would threaten the ability of each party to ultimately gain satisfaction from the business deal. Doing so means that the degree of inconvenience as well as the potential for either party incurring a significant amount of loss is kept to a minimum.
In order for a back-to-back guarantee to be put into place, both parties must provide information that confirms that the goods covered are the same. This means the descriptions of the goods or properties involved in the transaction must be concise. It is not unusual for both parties to come together in the task of developing that description, ultimately using it on the documents that are created to represent the terms of the reciprocal credit agreement. Doing so helps to prevent any questions that could arise at a later date, should a claim be made by one or both parties to the transaction.
The actual structure of a back-to-back guarantee is impacted by local trade regulations, although in most cases involving international locations, those regulations will be the same or similar for both the buyer and the seller. Typically, the standby credit that is used to create the back-to-back guarantee is often provided by some type of financial institution, such as the banks that are directly involved in the transfer of funds between the buyer and the seller. Legal counsel is normally called in to review the terms of the guarantee, make sure that the provisions are in compliance with applicable laws and regulations, and also make sure that the interests of each party is adequately protected.
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