5 Alternatives When a Bank Won’t Issue an LC
Your bank refused to issue a letter of credit. These five structures can sometimes solve the payment, supplier or working-capital problem another way.
When an LC is unavailable, identify the problem the LC was supposed to solve
A bank refusing to issue a documentary letter of credit does not necessarily mean the trade has to stop. The correct alternative depends on whether the supplier needs payment assurance, the buyer needs working capital, both parties need documentary control or the seller simply wants protection against credit risk.
A letter of credit performs several jobs at once. It can provide a bank payment undertaking, establish documentary conditions and help bridge the timing difference between shipment and payment. An alternative structure should therefore solve the actual commercial problem rather than simply replace one document with another.
Use a documentary collection
A documentary collection can work where the seller wants banks involved in the movement of shipping documents but does not require the buyer's bank to guarantee payment.
Under documents against payment, the collecting bank generally releases the documents after the buyer pays. Under documents against acceptance, the buyer may receive the documents after accepting an obligation to pay at a future date.
This is materially different from an LC. The collecting banks do not assume the same independent payment undertaking as an issuing bank under a documentary credit.
Consider a documentary collection where the parties already have some commercial history, the seller can tolerate buyer credit risk and the goods can be redirected or recovered if the buyer refuses to take them up.
Move to open account with trade credit insurance
If the seller's principal concern is non-payment rather than documentary control, trade credit insurance can sometimes support an open-account transaction.
The seller ships and invoices the buyer under agreed payment terms. An insurer then covers specified eligible losses subject to the policy terms, buyer limit and exclusions.
Insured receivables may also be more acceptable to certain working-capital lenders because part of the underlying buyer credit risk has been transferred.
This is most relevant where the buyer has acceptable commercial credit but lacks an LC facility. The seller should obtain an approved buyer limit before extending substantial open-account terms.
Negotiate deposits and milestone payments
Some transactions can be financed contractually rather than through a bank instrument. The buyer may pay an initial deposit followed by additional payments when specific production, inspection or shipment milestones are reached.
This reduces the seller's funding requirement and limits the amount the buyer has exposed at any one time.
A controlled escrow structure can also be considered where the parties need an independent mechanism for holding and releasing funds against objectively defined conditions.
Milestone payments work best where performance stages can be verified objectively. The commercial contract should define each release condition before production begins.
Use a funded trade finance facility
Sometimes the real problem is not the absence of an LC. The buyer simply lacks enough cash to pay the supplier before the inventory is imported, sold and converted back into cash.
A trade lender may be able to finance the supplier directly and obtain repayment later from inventory sales or downstream receivables. The lender will normally analyze the supplier, goods, buyer, logistics, margins and repayment flow.
Depending on the transaction, the lender may require control over inventory, receivables or collection accounts.
Financely explains the broader structure in its guide to import finance facilities .
Use funded trade finance where the buyer has a credible resale or repayment event but cannot bridge the supplier payment from existing liquidity.
Arrange issuance through another acceptable bank structure
The LC may still be the right instrument even when the applicant's existing bank cannot issue it. The reason may be internal country limits, insufficient trade facilities, beneficiary-bank restrictions or lack of the required product capability.
A company can then explore another relationship bank, a properly collateralized LC facility or a counter-guarantee structure involving another acceptable institution.
This is not the same as purchasing an LC from an unknown online provider. Legitimate issuance still requires banking relationships, KYC, credit approval and review of the underlying transaction.
Financely outlines the conventional process in how to secure a letter of credit .
Another issuer makes sense when the original refusal is specific to that bank. If the underlying problem is inadequate repayment capacity, insufficient collateral or a weak trade, changing banks may not change the credit outcome.
Supplier payment risk, pre-shipment funding, buyer liquidity and documentary control are separate problems. The best alternative is the structure that addresses the specific exposure preventing the trade from moving forward.
Further reading
Need another structure for a live trade?
Financely works with importers, exporters and commodity traders that have identified counterparties and a legitimate commercial transaction but need a different financing or payment structure because conventional bank issuance is unavailable.
Request a QuoteFinancely provides advisory and transaction-structuring services. Financely is not a bank and does not itself issue letters of credit or provide regulated banking services. Financing and issuance remain subject to independent underwriting, KYC and compliance approval.
