Letter of Credit Arrangement Services for Companies

Letter of Credit Issuance Starts With the Transaction

A letter of credit is a bank undertaking. The issuing bank agrees to honor according to the instrument's terms, which means the bank is taking real credit exposure to the applicant.

This is why obtaining a letter of credit is not simply an administrative exercise in sending an MT700. The issuing institution has to understand who is requesting the instrument, why it is required, how the applicant will reimburse the bank, what collateral supports the exposure and whether the underlying transaction satisfies the bank's credit and compliance requirements.

The first question is therefore not, "Which bank can issue the LC?" The first questions are: what does the commercial contract require, which type of credit fits that obligation, how much exposure will the bank assume and what supports reimbursement?

Our trade finance structuring process is designed around precisely those questions.

Types of Letters of Credit We Arrange

The expression "type of letter of credit" can be misleading because several features can exist in the same instrument. A documentary credit might simultaneously be irrevocable, confirmed, transferable and available by deferred payment.

The following structures cover the principal documentary and standby letter of credit requirements encountered in international trade, procurement, commodity transactions, projects and commercial contracts.

Documentary Letter of Credit Issuance

A documentary letter of credit is commonly used when a seller wants a bank undertaking before manufacturing or shipping goods, while the buyer does not want to make an unconditional cash prepayment.

The issuing bank undertakes to honor when a complying presentation is made. The credit can require documents such as a commercial invoice, bill of lading, packing list, inspection certificate, certificate of origin, insurance document or other objectively verifiable evidence related to the shipment.

The instrument deals in documents. It should therefore be drafted so that the beneficiary can realistically produce the required documents and the bank can objectively determine compliance.

Conditions that depend on subjective commercial judgments or documents that no party can actually issue create unnecessary discrepancy risk.

Sight Letter of Credit Issuance

A sight letter of credit is appropriate when the supplier requires prompt payment after presenting compliant documents.

For the importer, however, the economic issue is reimbursement. Goods may still be on the water when the bank expects reimbursement, and the importer may not generate customer cash until weeks after arrival.

This is why a sight credit can sometimes be combined with post-import financing, inventory finance or another working-capital structure. The supplier receives the payment terms it requires while the applicant receives financing more closely aligned with its cash conversion cycle.

Usance and Deferred Payment Letter of Credit Issuance

A usance or deferred-payment credit pushes settlement to an agreed future maturity. The tenor may run from the bill-of-lading date, presentation date or another contractually defined event.

This can give an importer enough time to receive the goods, clear customs, sell inventory and collect customer proceeds before reimbursement becomes due.

Longer tenor increases bank exposure, however. The issuing institution therefore evaluates the applicant's financial capacity, underlying transaction and collateral for the full exposure period.

UPAS Letter of Credit Issuance

UPAS, or usance payable at sight, addresses one of the most common trade-finance mismatches.

The supplier wants sight payment. The importer wants deferred repayment.

Under the appropriate banking structure, the beneficiary receives the agreed sight economics while the applicant receives a usance period and repays later. Financing costs associated with the deferred period form part of the transaction economics.

This can be particularly useful where the supplier has sufficient bargaining power to refuse 60 or 90-day commercial credit but the applicant cannot efficiently fund the purchase immediately.

Confirmed Letter of Credit Issuance

Issuance alone may not satisfy the beneficiary. An exporter can be comfortable with the buyer but unwilling to accept the credit risk of the issuing bank or its jurisdiction.

A confirmed letter of credit adds another bank's independent undertaking to the issuing bank's obligation. The confirming institution therefore evaluates issuing-bank risk, country exposure, tenor and transaction structure before adding confirmation.

Confirmation costs vary materially according to the issuing bank and country. A strong issuing institution in a low-risk jurisdiction can produce very different economics from an unfamiliar bank operating in a higher-risk market.

Transferable Letter of Credit Issuance

A transferable letter of credit can be useful where a trading firm stands between the end buyer and the underlying supplier.

The buyer establishes the credit in favor of the trader as first beneficiary. Subject to the credit expressly permitting transfer and the transferring bank agreeing to act, drawing rights can be transferred to one or more second beneficiaries.

This structure is particularly relevant where the trader does not want or need to establish a completely independent upstream credit.

Transferability should be addressed when the commercial terms are being negotiated. A credit that does not state that it is transferable cannot simply be converted into a transferable credit because the beneficiary later discovers that it needs one.

Back-to-Back Letter of Credit Issuance

Back-to-back letter of credit structures are used where a trader receives one credit from its buyer and needs a second, separate credit issued to its own supplier.

The master credit and supplier credit remain separate instruments. The issuing bank therefore needs to understand whether the master credit provides sufficient support, how the trader's margin is protected and whether the documentary conditions can be aligned.

The critical issue is mismatch risk. Shipment dates, presentation periods, quantities, documents and payment terms need to be structured so the trader is not obligated to pay its supplier while being unable to draw under the downstream credit.

We also structure these transactions through our wider trade transaction structuring practice.

Revolving Letter of Credit Facilities

Repeatedly opening a new letter of credit can become inefficient when the same buyer and supplier execute regular shipments.

A revolving letter of credit can reinstate availability according to agreed mechanics. It may revolve after utilization or according to predetermined periods.

A cumulative revolving credit allows unused availability from one period to carry into a later period. A non-cumulative structure does not.

For recurring imports or commodity procurement, the more important financing objective may therefore be obtaining a repeatable letter of credit facility rather than arranging a single instrument.

Red Clause and Green Clause Letters of Credit

Some suppliers need capital before shipment rather than after it.

A red clause letter of credit can permit a pre-shipment advance to the beneficiary under the stipulated conditions. The structure can help finance production, procurement or preparation of the goods.

A green clause credit incorporates additional protections around the advance, historically including documentary evidence connected with warehousing or control of goods.

These instruments create greater pre-shipment exposure and therefore require stronger underwriting. They are not an automatic solution for an undercapitalized supplier.

Standby Letter of Credit Issuance

A standby letter of credit is economically different from the ordinary documentary credit used to pay for a shipment.

In a conventional commercial documentary credit, presentation and payment are expected as part of the normal trade cycle. A standby is generally intended to support another obligation and becomes drawable according to its terms if the applicant fails to pay or perform.

Standby requirements can arise in construction, procurement, energy, leases, supply agreements, project finance, credit facilities and other commercial contracts.

Our dedicated standby letter of credit service covers legitimate corporate standby requirements subject to underwriting and issuer approval.

Financial Standby Letter of Credit

A financial standby supports a payment or repayment obligation. It may secure lease obligations, deferred payment obligations, debt service or another specified financial commitment.

Performance Standby Letter of Credit

A performance standby supports contractual performance. Contractors, suppliers and project companies may be required to provide this form of security before receiving an award or commencing work.

Advance Payment Standby Letter of Credit

A buyer paying an advance to a supplier may require standby security covering repayment of the advance if the supplier fails to satisfy the underlying contractual obligation.

Bid or Tender Standby Letter of Credit

Tenders for infrastructure, EPC, government procurement and major commercial projects can require bank-backed bid security before the tendering party's proposal is accepted.

Counter Standby Letter of Credit

Cross-border transactions sometimes require an undertaking from a bank in the beneficiary's jurisdiction. A counter standby can support the local bank's issuance of the final instrument.

Direct-Pay Standby Letter of Credit

A direct-pay standby is designed for expected payment rather than solely as a secondary default mechanism. Its economics and credit treatment therefore differ from the conventional performance backstop.

Commercial Standby Letter of Credit

A commercial standby supports payment for goods or services where the parties otherwise trade under open-account or other commercial terms.

Insurance Standby Letter of Credit

Insurance and reinsurance arrangements can use standbys to satisfy collateral requirements or secure defined payment obligations.

Letter of Credit Margin Financing

Many viable transactions reach the same obstacle: the bank is prepared to consider the letter of credit, but the applicant cannot provide the requested cash margin.

A request for a USD 10 million letter of credit does not mean the bank will automatically assume USD 10 million of unsecured exposure. Depending on the applicant's credit quality, the bank may require cash collateral, pledged assets, guarantees, borrowing-base support or other forms of credit enhancement.

Where the underlying transaction is sufficiently strong, we can assess whether the margin requirement itself can be financed or whether other collateral can support issuance.

Our letter of credit issuance support addresses situations where additional structured backing is required to establish bank issuance capacity.

Letter of Credit Issuance for Commodity Transactions

Commodity transactions frequently require documentary credits because suppliers are unwilling to release significant quantities of oil, metals, agricultural commodities or other goods on unsecured open-account terms.

The issuing bank will examine the underlying transaction as well as the applicant. Relevant factors can include the supplier, buyer or offtaker, commodity, contract price, benchmark and differential, gross trading margin, title transfer, shipment terms, inspection, insurance and expected repayment source.

A commodity trader requesting a large letter of credit without sufficient capitalization does not become creditworthy merely because the trade appears profitable on paper.

The transaction may instead require a wider structured trade facility involving the letter of credit, inventory, receivables and controlled proceeds. These transactions can be assessed through our structured trade finance advisory process.

Letter of Credit Issuance for Import Transactions

An importer may need a letter of credit because its overseas supplier refuses cash-against-delivery or open-account terms.

The appropriate structure depends on the timing gap. If the supplier requires immediate payment after shipment, a sight letter of credit may work. If the importer needs time to convert inventory into cash, a usance, deferred-payment or UPAS structure may better align the obligation with the cash conversion cycle.

Where imports recur, we assess whether a revolving issuance line or broader trade finance facility is more efficient than arranging a series of unrelated credits.

Letter of Credit Issuance for Machinery and Equipment Purchases

Large machinery and equipment contracts often use staged payment mechanics. The supplier may require a deposit, milestone payment, shipment payment and final acceptance payment.

The letter of credit can be structured around those contractual milestones, potentially alongside advance-payment security or performance support where required.

The wording needs particular care. An expensive industrial asset may involve factory acceptance tests, inspection certificates, shipping documents, commissioning milestones and retention mechanics that need to reconcile with the underlying purchase agreement.

Letter of Credit Issuance for Projects and Contractors

Infrastructure, construction, energy and EPC contracts can require several instruments during the lifecycle of the same project.

A bidder may initially require tender security. The successful contractor may then need performance security. An advance-payment standby can protect the project owner after mobilization funds are paid. Additional security can be required during warranty or defect-liability periods.

The duration of these instruments matters because the bank's contingent exposure can remain outstanding for a substantial period.

How Our Letter of Credit Arrangement Process Works

Documents Required for Letter of Credit Issuance

The exact requirements depend on the instrument and bank, but a serious submission generally begins with the underlying commercial contract and enough financial information to underwrite the applicant.

Documents may include corporate registration records, beneficial ownership information, management identification, financial statements, bank statements, debt schedules, existing bank facilities, purchase contracts, sales contracts, purchase orders, invoices, beneficiary wording and evidence supporting the proposed source of reimbursement.

Commodity or inventory transactions can also require inspection arrangements, warehouse information, insurance, shipping documentation and evidence of downstream buyers.

If a beneficiary has already provided mandatory letter of credit wording, send it at the beginning. It is considerably more efficient to identify unacceptable terms before bank underwriting than after credit approval.

How Much Does Letter of Credit Issuance Cost?

Letter of credit pricing depends on credit risk and structure. There is no legitimate universal percentage that applies to every applicant and every issuing bank.

Bank costs can include issuance commission, utilization fees, SWIFT charges, advising fees, document examination fees, amendment fees and, where applicable, confirmation charges. Deferred-payment and UPAS structures can introduce additional financing costs. Collateral facilities may carry their own interest and arrangement economics.

Financely also charges for the professional structuring and arrangement work required to prepare and execute the mandate.

The appropriate economics can only be determined after reviewing the amount, tenor, applicant, beneficiary, transaction and collateral position.

Why Letter of Credit Wording Matters

Bank approval is only part of the process. An instrument can be financially approved and still be commercially problematic if its wording does not match the underlying transaction.

Typical issues include unrealistic presentation periods, incorrect transport-document requirements, inconsistent shipment dates, impossible third-party certificates, vague performance conditions or expiry mechanics that conflict with the commercial contract.

The objective is not to remove beneficiary protection. It is to create objective documentary conditions that protect the beneficiary while remaining executable by the applicant and supplier.

Confirmation, Advising and Authentication

The issuing bank normally transmits a documentary credit through banking channels to an advising bank. The advising bank authenticates the apparent authenticity of the credit before advising it to the beneficiary.

Advising does not automatically mean confirmation.

If the beneficiary requires confirmation, a qualifying bank must separately agree to add its own undertaking. That decision involves an additional credit analysis of the issuing bank, country and transaction.

This distinction becomes particularly important in emerging-market trade where the beneficiary may accept the applicant but require additional bank credit support before shipping.

MT700 and MT760 Are Messages, Not Products

The underlying financial instrument should not be confused with the SWIFT message used to transmit it.

MT700 is associated with issuance of a documentary credit through SWIFT. MT760 is used in connection with guarantees and standby instruments.

Saying that you "need an MT700" does not adequately describe a trade-finance requirement. The bank still needs to know who the applicant is, who the beneficiary is, what transaction is being supported, what the required terms are and how the exposure will be collateralized and reimbursed.

We Do Not Sell or Lease Anonymous Letters of Credit

Legitimate letter of credit issuance is linked to a real applicant and a real obligation. The bank completes KYC, approves credit exposure, establishes collateral or reimbursement arrangements and approves the wording before issuing the instrument.

This is different from internet offers involving anonymous "leased LCs," fabricated bank instruments, supposed pre-advice sequences or claims that a bank will issue millions of dollars of unsecured paper solely because an intermediary possesses a procedure sheet.

We do not participate in those structures.

If collateral is insufficient, the solution is to determine whether the transaction can support legitimate letter of credit backing, additional security or another financing structure.

Who Is a Good Fit?

The strongest mandates involve a defined contractual requirement, identifiable beneficiary, verifiable commercial transaction and an applicant capable of supporting at least part of the bank's credit exposure through cash flow, collateral or other acceptable credit support.

Typical transactions include imports, commodity purchases, equipment procurement, recurring supplier programs, EPC contracts, construction obligations, project security and other material B2B commitments.

We are not the appropriate provider for speculative requests with no underlying transaction, unidentified principals or a requirement to produce anonymous bank paper for resale or monetization.

Frequently Asked Questions