What is LC discounting, and when does it make sense?

A letter of credit (LC) is a bank's promise to pay an exporter, provided the exporter presents documents that comply with the LC terms. With a usance LC, payment is due later, for example 90 or 180 days after shipment. LC discounting lets the exporter receive most of that money now, instead of waiting.

How it works

1. You ship the goods and present the documents required by the LC.
2. Once the issuing bank accepts the documents (or, in some cases, before), a financier pays you the LC amount minus a discount.
3. At maturity, the issuing bank pays the full amount to the financier.

What it costs

The discount is usually calculated on a 360-day year:

Discount = LC amount × annual rate × days to maturity ÷ 360. For example, USD 250,000 at 7.5% for 90 days is a discount of about USD 4,688.

The rate depends mainly on the issuing bank's strength, its country, the usance period, and whether the documents are clean. A platform fee may also apply.

When it makes sense

• You need working capital now to buy materials or take the next order.
• The discount cost is lower than what a slower cash cycle costs your business.
• You want to reduce your exposure to the issuing bank or country before maturity.

Questions to ask before you discount

• Is the financing with or without recourse to you if the issuing bank does not pay?
• Is the price fixed before or after the issuing bank accepts the documents?
• Are there any fees on top of the discount?
• Have your documents been checked for discrepancies? A discrepancy can delay acceptance and change the price.

On GIX Credit, each bid shows the condition (before or after acceptance) and the exact amount you receive, so you can compare offers like for like.