Back-to-Back Financing

Back-to-back financing

An intercompany loan channeled through a bank.

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Back-to-Back Financing

1. In foreign exchange, two equivalent loans issued by two companies in two countries to offset each other's currency risk. For example, suppose an American company wishes to open a European office and a European company wants to open an American office. The American company may lend the European company $1 million for start-up costs. This loan is calculated in dollars. At the same time, the European company loans the American company the equivalent of $1 million in euros to help with their start-up costs. Because both loans are made in the local currencies, neither company needs to worry about whether the exchange rate will favor them as the loans are paid back. This practice has become less common as currency swaps have become more common.

2. In international trade, see back-to-back letters of credit.