Letter of Credit Discounting Explained

Letter of Credit Discounting | Financely

Letter of Credit Discounting

If you hold a complying Letter of Credit, you can accelerate cash by selling or discounting the receivable to a bank or a fund. The approach bridges the gap between shipment and maturity, tightens working capital cycles, and reduces collection risk when the LC is confirmed by a strong bank.

Quick Take: Discounting advances funds against export LCs once documents comply. Pricing is driven by issuing bank quality, confirmation status, tenor, country risk, and document accuracy. Works for sight and usance LCs, including confirmed structures.

What Is Letter of Credit Discounting

A Letter of Credit (LC) is a bank undertaking to pay the seller if the presentation matches the terms. LC Discounting converts that future LC payment into immediate cash. The financier purchases the LC proceeds at a discount and collects from the issuing bank at maturity.

How It Works

  1. LC Issuance: Buyer arranges an LC in favor of the seller with clear terms and timelines.
  2. Shipment and Presentation: Seller ships and presents documents as required under the LC.
  3. Document Check: Nominated or confirming bank checks for compliance.
  4. Discounting: Once compliant, a bank or fund prices the risk and buys the receivable at a discount.
  5. Advance of Funds: Seller receives funds now. The financier is paid by the LC bank at maturity.

When It Makes Sense

  • Export sales under confirmed usance LCs where tenor stresses cash flow.
  • Concentration in a few buyers that creates collection timing risk.
  • Tighter supplier terms and the need to recycle working capital quickly.

Benefits

  • Cash Flow: Convert LC receivables to cash to fund production and purchases.
  • Risk Transfer: Shift payment timing risk to the discounter, especially on confirmed LCs.
  • Capacity: Support larger orders without slowdowns from receivable build up.

Standard, Red Clause, and Green Clause LCs

Different LC structures affect timing of funds and risk. Below is a concise comparison.

Feature Standard LC Red Clause LC Green Clause LC
Timing of Funds Payment after compliant presentation or at maturity Partial advance before shipment Advance for production and storage
Use Case Seller can wait for payment Seller needs pre shipment working capital Seller needs funds plus warehousing support
Risk to Financier Lower Higher due to advances Highest due to multiple advances
Typical Fees Lower Higher Highest

Key Risks and Pricing Drivers

  • Issuing and Confirming Bank: Ratings, reputation, and past performance on document handling.
  • Tenor: Longer usance increases carry and risk premium.
  • Country and Sector Risk: Sanctions, FX convertibility, and policy shifts affect appetite.
  • Document Accuracy: Discrepancies cut advance rates or block discounting until cured.

Steps to Discount an LC

  1. Review Terms: Confirm the LC is irrevocable and, if possible, confirmed by a strong bank.
  2. Assemble Documents: Drafts, invoice, transport document, packing list, certificate of origin, and any extra certificates.
  3. Select a Discounter: Bank or fund with LC experience in your corridor and product set.
  4. Get Pricing: Advance rate and discount margin quoted on a deal ticket.
  5. Close and Fund: Assign proceeds and receive funds upon compliance or acceptance.

Why Work With Financely

We structure export LC discounting with clear timelines and bankable documentation. Our role is to prepare the data room, align terms with financiers, manage correspondence on discrepancies, and keep the process moving until funds land. You get a single point of contact and disciplined reporting.

Accelerate Cash Against Your LC

Share your LC draft and shipment details. We will revert with advance rates, pricing bands, and a closing plan.

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