Letter of Credit

A Letter of Credit (LC) is a financial guarantee from a buyer's bank to a seller. Determining the correct LC value is critical because it defines the maximum exposure of the bank and the maximum revenue for the exporter. A common mistake is only LC-ing the product value, leaving no room for freight fluctuations or quantity tolerances.

Why Include a Margin?

• UCP 600 Compliance: Under international banking rules, a 'Tolerance' (usually 5% or 10%) allows for slight variations in goods quantity or weight without causing a discrepancy.
• Freight Contingency: If shipping on CFR or CIF terms, any unexpected bunker surcharges or port congestion fees can be covered within the LC limit if the margin is planned correctly.

This tool utilizes Standard Trade Finance Logic to ensure the bank facility opened is sufficient to cover the entire commercial obligation plus logistical variables. Corporate treasurers use these calculations to manage their credit lines effectively while providing full security to their international suppliers.