Trade Finance Explained: LC, Bank Guarantee & Bill Discounting

Trade finance instruments exist to solve one core problem — the buyer and seller in a transaction don't fully trust (or can't fully verify) each other, and there's often a timing gap between shipment and payment. Different instruments solve different versions of this problem.

Letter of Credit (LC)

A bank-issued guarantee that payment will be made to the seller once specified documents (proving shipment, quality, etc.) are presented — used heavily in import/export where buyer and seller are in different countries or don't have an established relationship.

• Sight LC: payment released as soon as compliant documents are presented
• Usance LC: payment deferred to a fixed date after document presentation, effectively giving the buyer credit period
• LC discounting: the seller can discount a usance LC with a bank to receive funds immediately, rather than waiting for the deferred payment date

Bank Guarantee (BG)

A commitment from the bank to pay a specified amount if the applicant fails to fulfil a contractual obligation. Common types:

• Performance BG: assures the counterparty that a contract will be completed as agreed — common in construction and large supply contracts
• Financial BG: guarantees a payment obligation will be met
• Bid Bond BG: submitted with tenders to show serious intent to honour the bid if awarded

BGs don't involve upfront cash outflow for the applicant — but they use up sanctioned limits with the bank, similar to a loan, and carry a commission cost.

Bill / Invoice Discounting

Converts an approved but unpaid invoice into immediate cash, at a discount, instead of waiting for the customer's credit period to end. This is one of the most useful instruments for manufacturers and suppliers dealing with large buyers who insist on 60–90 day payment terms.

• Reduces the working capital strain of long buyer credit cycles
• Can be arranged against a single invoice or as a running limit against a pool of approved buyers
• Pricing depends on the buyer's credit standing at least as much as the seller's — a stronger buyer often means cheaper discounting

Export/Import-specific facilities

• Export working capital (pre-shipment/post-shipment credit): funds procurement and production before shipment, and bridges the gap between shipment and payment realisation after
• Supply chain / vendor / dealer / channel finance: funds working capital across a buyer's or anchor company's supply chain, typically priced off the anchor's credit strength

Choosing the right instrument

The instrument should match the actual gap in the transaction — an LC solves counterparty trust, a BG solves performance assurance, and discounting solves a cash-timing gap. Many manufacturers end up needing a combination — an LC to buy raw material and an invoice discounting limit to fund the receivable that results from selling the finished goods.

How we help

We structure a combined trade finance limit — LC, BG and discounting — sized to your actual trade cycle, rather than arranging each instrument separately with a different lender.

Frequently Asked Questions