Back-to-Back Letters of Credit: How Bangladesh Garment Exporters Import Fabric Duty-Free From China

If you run an export-oriented knitwear or woven factory in Bangladesh and you buy fabric, yarn, zippers or interlining from China, you have probably heard your banker use the phrase “back-to-back L/C” without ever explaining what makes it different from an ordinary import letter of credit. The difference is the whole point. A back-to-back L/C (BTB) lets you import raw materials against the strength of the export order you already hold, on deferred payment terms, and—when it is paired with a bonded warehouse licence—without paying customs duty or VAT on those inputs. This guide walks through how the instrument actually works, what has to be in place before your bank will open one, and where importers get tripped up.

What a back-to-back L/C actually is

A back-to-back arrangement is two letters of credit tied together. The first is the “master” or “export” L/C: your foreign buyer’s bank opens it in your favour for the finished garments. You do not have the cash to buy inputs, but you do have a confirmed, bank-backed order. Your bank in Bangladesh treats that master L/C as security and opens a second, smaller L/C—the back-to-back—in favour of your Chinese fabric or accessories supplier. The value of the BTB is capped as a percentage of the master L/C, because your bank needs the export proceeds to comfortably cover the import payment plus your other costs and margin.

The mechanism matters because it changes who is carrying the financing risk. In a normal import L/C you (or your cash margin) fund the deal. In a back-to-back, the repayment source is the export proceeds that will arrive when your buyer pays. That is why banks scrutinise the master L/C so closely: its terms, its expiry, its shipment date and the reputation of the issuing bank all decide whether your BTB gets opened and on what terms.

Why it is usually on usance (deferred) terms

Back-to-back L/Cs are almost always opened on usance terms—commonly up to 180 days from the bill of lading date for imports from outside the region—rather than at sight. The logic is a cash-flow chain: you import fabric, you spend weeks cutting, sewing, finishing and shipping the garments, then you wait for your buyer to pay. A sight payment to your Chinese supplier would force you to find bridge finance for that entire production cycle. A usance BTB pushes the payment date out so that, if everything runs to plan, the export proceeds land before or around the date the import bill matures.

The trade-off is acceptance commission and interest for the deferred period, which the supplier either prices into the unit rate or expects you to bear. If you want to understand the sight-versus-usance choice in its own right, read our companion piece on sight L/C versus usance L/C.

The bonded warehouse licence is what makes it duty-free

The back-to-back L/C by itself is a payment structure. The duty-free part comes from a separate authorisation: the bonded warehouse licence issued under the Customs Act, administered by the Customs Bond Commissionerate. An export-oriented RMG or textile unit that holds a valid bond licence can clear imported fabric, trims and packing materials without paying import duty, VAT, advance income tax or the regulatory and supplementary duties that a commercial importer would pay—provided those inputs stay within the entitlement written into the licence.

The entitlement is the ceiling. It is calculated from your machine capacity, your product mix and standard consumption norms. Anything you import above the entitlement, or anything you cannot account for against exports, becomes payable at full duty and taxes, often with a penalty. This is why bonded factories keep a bond register reconciling every import against the finished goods that left the country. The back-to-back L/C and the bond licence work as a pair: the L/C finances the input, the bond licence exempts it, and the export shipment discharges both.

What your bank checks before opening a BTB

Expect the authorised dealer bank to look hard at the following before it commits:

• A clean, operative master export L/C from an acceptable issuing bank, with enough time between its latest shipment date and its expiry for you to actually produce and ship
• Your BTB value staying within the permitted margin of the master L/C value, so the export proceeds cover import payment plus freight, wages, overhead and margin
• A valid bonded warehouse licence with unused entitlement for the specific inputs you want to import
• Your past performance: realisation of earlier export proceeds, any overdue back-to-back bills, and whether earlier bonds were reconciled on time
• Proforma invoice from the Chinese supplier that matches the fabric specification, quantity and price implied by the master L/C

If any of these is weak—an export L/C from an unfamiliar bank, a thin margin, an entitlement that is nearly exhausted—the bank may ask for extra cash margin, which partly defeats the purpose. Your relationship with the authorised dealer bank does a lot of quiet work here.

Where back-to-back deals go wrong

The most common failure is a timing mismatch. The master L/C’s shipment date slips because the buyer delayed approvals, but the back-to-back import bill still matures on its original schedule. Now you owe your Chinese supplier’s bank before your buyer has paid you, and you are scrambling for short-term finance. Build slack into the production calendar and, where possible, negotiate the master L/C shipment date with your buyer before you open the BTB.

The second failure is a specification or value gap between the two L/Cs. If your Chinese supplier ships a fabric that does not match what the garment buyer approved, you can end up holding inputs you cannot use on that order and a bond entry you cannot discharge. The third is bond housekeeping: unreconciled entitlement, missing utilisation records, or inputs diverted to the local market. That is not just a customs problem; it can suspend your bond licence and freeze your ability to open new back-to-back L/Cs at all.

If you are not an exporter

Back-to-back L/Cs and bonded duty-free import are tools for export-oriented manufacturing. A commercial importer selling into the domestic market does not get them—you pay duty and VAT, and you fund the L/C with cash margin or a normal credit line. If that is your situation, the telegraphic transfer and standard import L/C routes are what apply, and our note on bonded versus duty-paid imports explains the boundary.

A worked timeline of one back-to-back cycle

It helps to see the dates lined up. Your buyer’s bank opens a master export L/C in January with a latest shipment date in May and expiry in June. In February you open a back-to-back L/C on 150-day usance terms in favour of a Chinese knit-fabric mill, for a value comfortably inside the permitted margin of the master L/C. The fabric ships in early March; the 150-day clock starts from that bill of lading date, so the import bill matures in early August. You clear the fabric duty-free under your bond licence in mid-March, cut and sew through April, and ship the finished garments to your buyer in early May, inside the master L/C’s shipment window.

Your buyer’s payment against the export L/C lands in June or July—before the import bill falls due in August. That gap is the entire design goal: the export proceeds arrive first and fund the import payment, and the bond licence discharges as the export shipment is recorded against your entitlement. Now change one variable—the buyer delays approval and the garment shipment slips to June, past the master L/C’s shipment date. The master L/C has to be amended, the export payment moves to August or later, and suddenly your Chinese supplier’s bill matures before you have been paid. This is why the shipment dates on the two L/Cs, and the slack between them, deserve as much attention as the price.

Documentary discipline that keeps the bond clean

A back-to-back facility lives or dies on record-keeping. Customs and your bank expect you to be able to trace every metre of imported fabric to a finished garment that was exported. That means keeping the bill of entry, the back-to-back L/C documents and the goods-receipt note for each import; recording consumption against the standard norm for each style; and tying every export shipment back to the inputs it consumed in the bond register. If an audit finds imported fabric that cannot be accounted for against exports, that quantity becomes payable at full duty and taxes, often with a penalty, and a poor audit history can get your bond licence suspended—at which point you cannot open new back-to-back L/Cs at all.

Two habits prevent most problems. First, reconcile the bond register monthly rather than scrambling at audit time. Second, never divert bonded inputs to the local market, even temporarily to cover a domestic order—it is the single fastest way to lose the licence. If a portion of imported fabric genuinely will not be exported, regularise it by paying the duty on that quantity through the proper channel instead of leaving a gap in the register.

Every factory’s entitlement, margin percentage and acceptable usance tenor are set by its own bank and bond licence—we do not publish blanket figures because quoting a number that does not match your paperwork would only mislead you. If you want help lining up Chinese fabric and trim suppliers, verifying them, and getting proforma invoices that will pass your bank’s back-to-back check, talk to DE International. We handle sourcing, inspection and China-to-Bangladesh freight as one service, work alongside your China buying agent requirements, and can point you to reliable mills through our catalogue.