Why Letters of Credit Are Not Always the Best Option for Physical Commodity Trades

Letters of Credit (LCs) have long been viewed as the gold standard in commodity trading. They offer security for sellers and predictable payment mechanics. But that does not mean they are always the right tool. In fact, many professional buyers and sellers increasingly avoid LCs when possible — and for good reason.

LCs are expensive. They slow down deal flow. They require heavy documentation and banking involvement. For many trades, they introduce friction that simply does not match the commercial reality of how deals need to get done.

The Limits of Letters of Credit

For sellers, LCs provide comfort — but they also lock them into strict compliance with documentary requirements. Any error or delay can jeopardize payment. For buyers, they tie up credit lines and require cash or collateral to secure issuance.

In many cases, traders and principals prefer faster, more flexible solutions that still protect both sides of the transaction.

Alternatives Traders Use Every Day

Documentary Collection (D/P and D/A)

Documentary collections offer a middle ground. Under D/P (Documents Against Payment), the buyer can only take possession of the shipping documents once payment is made. Under D/A (Documents Against Acceptance), the buyer agrees to pay at a future date after accepting the documents.

These methods reduce costs and speed up processing while maintaining control over goods until payment or promise to pay is secured.

Telegraphic Transfer (T/T)

When buyers and sellers have strong commercial relationships, direct wire payments (T/T) are common. Often executed in tranches (deposit, shipment, delivery), this approach offers speed and flexibility, though it requires trust and market knowledge.

Open Account with Credit Insurance

Repeat buyers and sellers often operate on open account terms, with the seller insuring payment risk through trade credit insurance. This offers maximum speed and efficiency while mitigating non-payment risks.

Receivables Discounting and Supply Chain Finance

Buyers without immediate liquidity often leverage receivables finance or supply chain finance programs, allowing them to purchase cargo while deferring payment. Third-party financiers pay the seller upfront, with the buyer repaying later.

Prepayment and Offtake Agreements

In volatile or strategic markets, buyers may commit to prepayment structures or long-term offtake agreements. These deals secure supply and pricing while offering sellers upfront capital to manage production and logistics.

What Makes Sense Depends on the Deal

No single payment structure fits every commodity trade. Factors like transaction size, counterparty relationship, market volatility, and logistics all determine which method works best. Sophisticated traders mix and match — using LCs where necessary, but preferring faster, more cost-effective solutions where possible.

At Financely, we support sponsors, traders, and buyers with structuring and capital solutions that reflect real market practices. Whether the deal calls for structured trade finance, receivables-backed instruments, or bespoke payment arrangements, our platform engages with counterparties to deliver workable paths to closing.

The Bottom Line

Letters of Credit have a role in commodity trading — but they are not always the first choice. Alternatives like D/P, D/A, T/T, receivables financing, and prepayment models offer more flexible, commercially aligned pathways for getting deals closed. Successful operators understand when and how to use each.

Financely provides the expertise and network access to help serious sponsors and traders execute transactions without unnecessary obstacles. If speed, security, and commercial flexibility matter to your deal, our team is ready to support.