Letter of Credit vs Standby LC — Which Saves You More in 2025?
Same promise, different paperwork. Let’s sort the costs, risks, and red tape so you stop over-paying for peace of mind.
You’ve lined up a buyer, the cargo is nearly ready, and the bank pitches two safety nets: a classic Letter of Credit (LC) or a Standby LC (SBLC). Pick right and you shave thousands off fees; pick wrong and your margin leaks before the container even leaves port. Ready to keep that cash in your pocket?
1. Quick Definitions
Letter of Credit (LC) — A transactional instrument. Ship the goods, present the documents, get paid. Ideal for repetitive shipments where every container needs its own proof trail.
Standby LC (SBLC) — A back-up promise. If the buyer fails to pay, you draw on the SBLC by claiming default. Until that moment, it sits quietly in the background.
Think of the LC as a pay-on-performance invoice and the SBLC as an insurance policy you hope never to trigger.
2. Cost Breakdown 2025
| Fee Bucket | LC (bps) | SBLC (bps) | Savings Angle |
|---|---|---|---|
| Issuance / Setup | 65 – 120 | 80 – 140 | LC cheaper on short tenor |
| Confirmation / Advising | 40 – 90 | 35 – 85 | SBLC wins if rated buyer |
| Amendments | 45 flat USD | 30 flat USD | Negotiate free first change |
| Draw/Claim | 0 | 75 flat USD | Only hits if buyer defaults |
Rule of thumb: For trades under 90 days, a standard LC usually lands 10–25 bp cheaper all-in. Stretch past six months and the SBLC’s lower confirmation rate often flips the equation.
3. What Exactly Gets Covered?
LC covers the buyer’s performance risk and the documentary quality of the goods shipped. Present clean paperwork that matches the LC terms and the issuing bank must pay—regardless of buyer insolvency.
SBLC covers the buyer’s payment risk only. You claim default by submitting a demand letter and any evidence required in the SBLC wording. The bank pays out, then chases the buyer.
Bottom line? If you fear both non-payment and picky document disputes, stick with the trusty LC.
4. When to Use Which
- LC — New trading partner, high-value machinery, or tight delivery penalties.
- SBLC — Commodity trade with a well-rated buyer, tender bonds, project milestones.
- Hybrid — Issue SBLC for the full contract, top up with individual LCs for tricky shipments.
5. Five Negotiation Plays
- Shop confirmation — Fast quotes from at least three confirming banks. Throw the lowest back at your main bank.
- Cap amendments — One free tweak in the term sheet stops banks milking you for typos.
- Push MT 798 — Digital doc presentation kills courier fees and slashes discrepancy risk.
- Escalate tenor tiers — Some banks price 0–90 days lower than 91–180 days. Can you settle earlier?
- Swap to SBLC — If your buyer holds an investment-grade badge, confirmation gaps shrink. Move the whole deal to SBLC and pocket the spread.
6. FAQ in Plain English
Q: Can I split one SBLC over multiple shipments?
A: Yes. Draft it as a revolving SBLC or set the value high enough to cover the lot.
Q: Do I still need cargo insurance under an LC?
A: Absolutely. The LC covers payment risk, not lost containers or soggy cartons.
Q: My buyer’s bank won’t confirm—now what?
A: Add a separate confirming bank or flip to an SBLC favouring your own bank.
