Q:

What is a counter credit?

A:

Counter credit occurs when a letter of credit is issued as collateral for another letter of credit, according to BusinessDictionary.com. The bank of the first credit becomes the issuer of the second credit line. Both credits are irrevocable.

BusinessDictionary.com adds that counter credit is also called back-to-back letter of credit or reciprocal letter of credit. Investopedia notes that both forms of credit are meant to help sellers purchase items or services from subcontractors. The first letter of credit comes from the buyer's bank, and the seller relies on his bank to receive the second letter of credit. The subcontractor is the beneficiary of the credits, and payment is issued when the subcontractor fulfills his obligations. Counter credit is normally found when international parties are involved.

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