Letter of Credit Cost Calculator

Letter of credit (LC) is a bank-backed payment guarantee used in international trade to reduce buyer/seller risk. Seller gets paid once documentary requirements met; buyer doesn't pay until seller proves shipment. Banks charge 0.25-1% of LC value per 3 months as issuance fee, plus discrepancy fees (50-250) if documents have errors.

200,000 LC at 0.5% for 3 months = 1,000 issuance. Plus 50 discrepancy fee = 1,050 total. 0.525% of trade value. Fair price for transferring payment risk from seller (will buyer pay?) to bank (standby guarantee). Large value shipments above 25k usually justify LC cost; smaller amounts often use simpler documentary collection.

LC types: sight LC (immediate payment on document presentation), usance LC (deferred payment 30-180 days). Confirmed LC (second bank also guarantees, adds cost). Standby LC (backup if primary payment fails). The choice usually turns on counterparty risk tolerance. Well-run businesses trade LC rarely with trusted counterparties, using it for big deals or emerging-market customers.

A worked example

With the defaults: lc amount of 200,000, lc fee of 0.5%, lc term of 3 months, discrepancy fees of 50. The tool returns 300.00.

What moves the number most

The result responds to LC Amount, LC Fee % (quarterly basis), LC Term (months), and Discrepancy Fees.

The formula behind this

Issuance fee = LC amount × fee % × (term months ÷ 12). Total = issuance + discrepancy fees.

What this doesn't capture

The result reflects only the inputs you provide and the assumptions built into the formula. It is a simplified model rather than a complete picture, and factors specific to your situation may matter just as much.

A time component and a fixed component

The cost has a time component and a fixed component, and short terms make the fixed part dominant. At the defaults, 200,000 at a 0.5% quarterly-basis fee over three months costs 250, with 50 in discrepancy fees taking the total to 300. Extending the term to twelve months would raise the fee element fourfold while leaving the discrepancy charge unchanged.

The charges that sit outside the figure

Discrepancy fees are the part most often underestimated, because they are charged per presentation that fails to match the credit exactly, and rejections on first presentation are common in trade documentation. Confirmation charges where a second bank adds its guarantee, amendment fees, and correspondent bank charges all sit outside this calculation. The figure represents the issuing cost rather than the full landed cost of the instrument.