Bank Guarantee
The LC’s safety-net cousin — performance, advance, retention and financial guarantees, and the surety alternative.
Explore bank guarantees → The bank’s credit, standing in for yours.
Letter of Credit — Sight, Usance, SBLC & LC Discounting, Done Right
A letter of credit lets a seller ship to a buyer it doesn’t know — the bank pays against compliant documents. We arrange inland and foreign LCs across PSU and private banks, structure the non-fund-based limit they draw on, get the documentation right so it isn’t refused, and discount usance LCs so cash isn’t stuck waiting on a due date. India-correct on UCP 600 and the RBI/FEMA overrides the generic guides miss. Part of Finnova’s ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011.
UCP 600 · RBI/FEMA Sight · Usance · SBLC LC discounting
Finnova’s corporate-finance track record since 2011, in numbers
₹4,250 Cr+
Capital mobilised across sectorsUCP 600
39 articles — with RBI/FEMA on top5 days
Max bank document-exam window4
Parties in the LC mechanismSince 2011
CA / ex-banker, senior on every fileA letter of credit (LC) is a written undertaking by a bank to pay a seller (the beneficiary) on behalf of a buyer (the applicant), provided the seller presents documents that comply with the LC’s terms. It substitutes the bank’s credit for the buyer’s. LCs are governed by UCP 600 (ICC Publication No. 600, 39 articles, a five-banking-day examination window) — but in India RBI and FEMA rules override UCP 600 wherever they conflict. An LC is a non-fund-based limit: it doesn’t lend cash, it lends the bank’s name. See the full corporate finance & debt syndication practice.
Finnova Advisory is an advisory firm — we structure the file, the limit and the documentation; the bank issues and negotiates. Charges and discounting rates are set by the bank, case by case.
How a letter of credit works
The four-party mechanism, step by step
An LC moves on documents, not goods. Get the documents right and payment is near-automatic; get them wrong and a compliant-looking deal can be refused.
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Buyer applies — issuing bank opens the LC
Applicant + Issuing bankThe applicant (buyer) asks its bank to open an LC in the seller’s favour, against a sanctioned non-fund-based limit and margin. The issuing bank opens it.
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LC advised to the seller
Advising / Negotiating bankThe LC is routed to the beneficiary (seller) through an advising/negotiating bank on the seller’s side, which authenticates it.
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Seller ships & presents documents
BeneficiaryThe seller ships the goods and presents the exact documents the LC demands — bill of lading, invoice, insurance, certificates — to the negotiating bank.
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Banks examine — within 5 days
UCP 600The banks examine the documents within a maximum of five banking days. If they comply on their face, the bank must honour; even minor discrepancies can justify refusal.
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Payment & settlement
Sight or usanceOn a sight LC the seller is paid against compliant documents; on a usance LC payment falls due later (and can be discounted). The buyer reimburses the issuing bank.
Every variant, mapped
Types of letter of credit
Most LCs are described along three axes — when they pay, where they operate, and how they’re structured. Here is the set you’ll actually meet.
| Type | Axis | What it is |
|---|---|---|
| TypeSight LC | AxisWhen it pays | What it isIssuing bank pays on presentation of compliant documents — “at sight”. The default for spot trade. |
| TypeUsance / Deferred LC | AxisWhen it pays | What it isPayment falls due at a future date (e.g. 90 days from B/L) — gives the buyer a credit period; the seller can discount it. |
| TypeInland LC | AxisWhere | What it isA domestic LC between two Indian parties — increasingly issued electronically. |
| TypeForeign / Import-Export LC | AxisWhere | What it isCross-border LC; sits under RBI/FEMA trade rules with EDPMS/IDPMS reporting. |
| TypeSBLC (Standby LC) | AxisFunction | What it isGuarantee-like — drawn only on default; governed by UCP 600 or ISP 98. Common in cross-border deals. |
| TypeTransferable / Back-to-Back | AxisStructure | What it isFor intermediaries/traders — the credit is transferred, or a second LC is opened against the first. |
Other variants you may see — revolving (reinstates for repeat shipments), red-clause (allows a pre-shipment advance), confirmed (a second bank adds its own guarantee of payment). On the import side, an LC often pairs with buyer’s credit / supplier’s credit under the RBI ECB & Trade-Credit framework — we structure the two together.
The comparison everyone gets wrong
LC vs bank guarantee — and why a usance LC is also a cash-flow tool
An LC is the payment mechanism of a trade; a BG is the safety net behind a contract. Confusing the two is the single most common — and most expensive — trade-finance mistake.
LC vs BG, in one line each
Both are non-fund-based limits and both draw on your NFB line — see the full bank guarantee page.
LC discounting — get paid before the due date
- On a usance LC, the accepted bill can be discounted so the seller is paid early.
- The buyer keeps the credit period; the seller doesn’t wait — both sides win.
- Cost = opening commission + usance/negotiation charges + the discounting rate.
- We benchmark the all-in cost per case — there is no single “LC rate”.
See also supply chain finance for receivables-side liquidity.
Why Finnova for letters of credit
We get the LC accepted — and the cash moving
A bank opens the LC; we make sure it’s the right LC, the documents won’t be refused, the limit supports it, and a usance bill is discounted rather than left to sit.
01
India-correct on UCP + FEMA
UCP 600 is the rulebook; RBI/FEMA overrides it here. We structure to both, so the LC clears KYC, EDPMS/IDPMS and trade-credit norms.
02
Documents that don’t get refused
Most LC disputes are discrepancy fights. We align the document set to the LC terms before presentation — five banking days, no surprises.
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The right limit behind it
We structure the non-fund-based limit the LC draws on — alongside your CC/WC and BG lines on a single sanction.
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Usance LCs, discounted
We arrange LC discounting so a 90-day usance LC funds today — and benchmark the all-in cost across lenders.
Consultation
Opening an LC — or want one discounted?
Tell us the trade and we’ll tell you the right LC (sight, usance, SBLC), what it’ll cost all-in, the documents to get right, and whether a usance LC can be discounted to free your cash. No bank pitch — a straight read from people who run trade-finance files every week.
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FAQ
Letters of credit, answered
A letter of credit (LC) is a bank’s written promise to pay a seller on behalf of a buyer, provided the seller presents documents that comply exactly with the LC’s terms. It substitutes the bank’s credit for the buyer’s, so a seller will ship goods to a buyer it doesn’t know. LCs are governed globally by UCP 600 (ICC Publication No. 600); in India, RBI and FEMA rules override UCP 600 wherever they conflict.
An LC is a payment instrument — the bank pays the seller when compliant documents are presented, in the normal course of a trade. A bank guarantee pays only if its customer defaults — it is a safety net, not the payment mechanism. Put simply: an LC is expected to be paid; a performance BG is expected not to be invoked. They are not interchangeable.
Under a sight LC the issuing bank pays as soon as compliant documents are presented (“at sight”). Under a usance (or deferred) LC, payment falls due at a future date — say 90 days from the bill of lading — giving the buyer a credit period. A usance LC can often be discounted, so the seller still gets paid early while the buyer keeps the term.
A standby letter of credit is a guarantee-like instrument: unlike a commercial LC, it is meant to be drawn only if the applicant defaults — closer in function to a bank guarantee. It is governed by UCP 600 or by ISP 98 (ICC). SBLCs are common in cross-border deals where the counterparty is more comfortable with an LC-style instrument than a local BG.
Under UCP 600, a bank has a maximum of five banking days following presentation to examine the documents and decide whether to honour or refuse. Documents must comply on their face with the LC terms; even small discrepancies can justify refusal, which is why getting the documentation right the first time matters so much.
On a usance LC, the seller can discount the accepted bill with a bank to get paid before the due date, for a discounting charge. The total cost of an LC includes issuance/opening commission, usance/acceptance and negotiation charges, amendment fees, and the discounting rate if applied — all varying by bank, tenor and the buyer’s credit. We benchmark the all-in cost per case rather than quoting a single number.
Both — but Indian law prevails on conflict. UCP 600 is the contractual rulebook banks incorporate into the LC. For an Indian transaction, RBI/FEMA requirements (KYC/AML, EDPMS/IDPMS reporting, trade-credit limits and permitted end-uses) override UCP where they clash — an Indian bank must refuse a transaction that is UCP-compliant but breaches Indian law. AI summaries routinely miss this; we don’t.