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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 arranging some type of guarantee on the performance of a seller or owner, while granting some kind of warranty 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 greatly minimizing that loss. The terms of this type of reciprocal agreement are often documented in the body of a consecutive letter of credit.
Creating a back-to-back guarantee is often found when transactions involve a large amount of money. This approach is sometimes used as part of the agreement for an import/export deal. The approach can also be used when an asset, such as commercial property, is sold. As part of the warranty agreement, both parties are protected from unforeseen events that would threaten each party’s ability to ultimately obtain satisfaction from the deal. This means that the degree of inconvenience, as well as the potential for either party to incur a significant amount of loss, is minimal.
In order for a consecutive warranty to be implemented, both parties must provide information that confirms that the covered products are the same. This means that descriptions of the goods or properties involved in the transaction must be concise. It is not uncommon for both parties to join in the task of developing this description, ultimately using it in the documents that are created to represent the terms of the reciprocal credit agreement. This helps to avoid any doubts that may arise at a later date if a claim is made by one or both parties to the transaction.
The actual structure of a back-to-back guarantee is affected by local business regulations, although in most cases involving international locations, these regulations are the same or similar for both buyer and seller. Typically, the standby credit used to create the back-to-back guarantee is often provided by some type of financial institution, such as banks that are directly involved in transferring funds between the buyer and seller. Typically, the legal advisor is called upon to review the terms of the warranty, make sure that the clauses comply with applicable laws and regulations, and also make sure that the interests of each party are adequately protected.