Trade finance and letters of credit
Bank tools that make buying from or selling to other countries safer and easier to finance: letters of credit, documentary collections, standby letters of credit and forfaiting. They cost fees, need careful paperwork, and each suits a different level of trust between buyer and seller.
- Secured on invoices
- Secured on assets
How it works
When you trade across borders, the question is who carries the risk between shipping the goods and being paid. The U.S. Department of Commerce's Trade Finance Guide describes the main tools.
Letter of credit (LC). The buyer's bank promises to pay the seller once the seller presents the documents the LC asks for, such as shipping documents, exactly as stated. Banks deal in documents only, not goods: a mistake in the paperwork can hold up or stop payment. LCs are irrevocable unless they say otherwise, and can cover one deal or a series.
- If you are buying (importing): your bank opens the LC for you against your own credit with it, and you pay it a fee. Your seller gets a bank's promise instead of yours.
- If you are selling (exporting): you can ask for the LC to be confirmed by a bank in the US, which adds its own promise to pay if the buyer's bank does not. Confirmation also makes it easier to get paid early, before the due date.
Documentary collection. Your bank sends the shipping documents to the buyer's bank, which hands them over only when the buyer pays, or signs a promise to pay on a set date. Cheaper and simpler than an LC, but the banks do not guarantee payment. The guide says to use it only for established relationships, stable markets and ocean shipments, where the documents control the goods.
Standby letter of credit. A bank's promise to pay if a party fails to do what it agreed, such as paying invoices on time. Buyers can use one to get open account terms; sellers can post one as a bid bond, performance bond or advance payment guarantee.
Forfaiting. A specialist buys your medium- and long-term export receivables (180 days to seven years or more) at a discount, without recourse, so it takes the risk that the buyer does not pay. The guide gives a minimum deal of $100,000 and says the cost is often higher than a commercial loan.
For working capital to fill export orders, see SBA export loans and EXIM; for insuring foreign invoices, export credit insurance is part of the EXIM route.
Upsides and downsides
Upsides
- Lets you trade with new or distant partners without trusting them to pay or ship first
- A confirmed LC moves the payment risk from the buyer to a US bank
- Forfaiting takes the payment risk off your hands on long credit terms
- LCs and confirmations make it easier to get paid or financed before the due date
Downsides
- Fees on every step, and LCs are relatively expensive in transaction costs
- Paperwork must match exactly, or payment can be held up
- Documentary collections give little protection if the buyer does not pay
Risks
- A small mismatch in documents can lose you the bank's promise to pay
- An unconfirmed LC leaves you exposed to the buyer's bank and the political risk of its country
- As the buyer, you owe your bank for an LC it has paid, even if the goods disappoint
What it costs
- How it is priced
- Bank fees for issuing, confirming, amending or collecting, set by each bank; a discount on receivables sold to a forfaiter
- Costs that are easy to miss
- Fees for issuing, confirming and changing an LC, set by each bank
- The LC or standby uses up part of your credit with your bank
Set deal by deal, by the value of the goods. Forfaiting starts at about $100,000 per deal.
Does it fit?
Could fit when
- You sell to customers in other countries and want to be sure of being paid
Unlikely to fit when
- You do not sell to customers in other countries (if you import, your bank can still open letters of credit for you)
- The business has no sales yet, so banks are unlikely to open LCs for it
Who can use it
- Business types: Sole proprietorship, Partnership, LLC, S corporation, C corporation, Benefit corporation, Cooperative
- Needs sales (revenue)
- Buying goods from, or selling goods to, customers in other countries
- For opening an LC or standby, enough credit with your bank, since an LC is a form of credit
- Staff or advisers who can prepare documents that match the LC exactly
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all asset-based and specialist lending
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- Export orders or contracts
- Shipping documents plan
- Financial statements
Regulation and protections
Regulators: Office of the Comptroller of the Currency (OCC); Federal Deposit Insurance Corporation (FDIC); Federal Reserve.
Who runs it: Private providers, nationwide.
Letters of credit are issued and confirmed by banks, which their regulators supervise. Federal Truth in Lending rules do not cover business finance, and the Equal Credit Opportunity Act (Regulation B) covers business credit. The terms of each LC decide what documents must show, so check them with your bank before you agree the sale.
Types of provider: Banks with trade finance teams; Specialist forfaiting firms and bank forfaiting departments.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 20, 2026.
Sources
- U.S. Department of Commerce, International Trade Administration: Trade Finance Guide (2022 edition) · checked October 20, 2026
- 12 CFR 1026.3 (Regulation Z): exempt transactions, including business credit · checked October 17, 2026
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