What is a Letter of Credit?
A Letter of Credit is a non-fund-based trade finance instrument issued by a bank on behalf of a buyer, guaranteeing payment to the seller/supplier once the agreed terms and conditions (such as shipment of goods or delivery of services) are met. It reduces the risk for both buyer and seller in a trade transaction, particularly in domestic and international trade where the two parties may not have an established relationship.
For businesses that regularly deal with suppliers or import raw material/machinery, an LC limit builds credibility and helps negotiate better commercial terms.
How a Letter of Credit Benefits Your Business
- Builds trust between buyer and seller in a trade transaction
- Enables better credit terms and pricing from suppliers
- Reduces payment risk in domestic and cross-border trade
- Supports smoother procurement of raw material and machinery
- Strengthens business credibility with new trade partners
Basic Eligibility for Letter of Credit
- Business operational for a minimum period with regular trade transactions
- Satisfactory banking relationship and credit history
- Adequate margin money / collateral as required by the issuing bank
- Clear underlying trade transaction (purchase order / contract)
- Sound financial standing to honor the LC on maturity
Facility Details
| Parameter | Details |
|---|---|
| Fee / Charges | 0.5% to 2% per annum (LC commission, varies by tenure and lender) |
| Professional Segment | 0.5% to 1.5% per annum |
| Minimum & Maximum Limit Amount | ₹5 lakhs to ₹25 crores+ |
| Minimum Business Vintage | Minimum 2–3 years |
| Age Limit | Min 25 years – Max 65 years |
Documents Generally Required
- KYC of business and promoters
- Purchase order / sale contract
- Last 2–3 years' financial statements
- Bank statements (last 12 months)
- Margin money as per lender requirement