Notice. This article is informational. We are not a bank or lender and do not issue loans, Letters of Credit, Standby Letters of Credit, guarantees, or insurance products. Any facility or instrument is provided by regulated counterparties under their own approvals, documentation, and compliance checks.
Are Bank Lines of Credit and Letters of Credit the same?
People mix these up because the names sound similar and both involve banks.
A bank line of credit is a funding facility for the borrower. A Letter of Credit is a payment instrument for a transaction. One is about your balance sheet and liquidity. The other is about performance and documentary conditions.
If you treat them as interchangeable, you end up requesting the wrong product, submitting the wrong pack, and wasting weeks.
Short answer
No. A line of credit provides cash availability. A Letter of Credit provides a conditional payment undertaking based on compliant documents.
Why it matters
They are underwritten differently, priced differently, documented differently, and monitored differently. Treating them as the same creates avoidable declines.
How banks underwrite each product
| Dimension | Bank line of credit | Letter of Credit |
|---|---|---|
| What it is | A corporate credit facility that provides revolving liquidity up to a limit, subject to covenants and availability mechanics. | A bank payment undertaking issued on behalf of an applicant to a beneficiary, payable on presentation of compliant documents and satisfaction of conditions. |
| Primary underwriting focus | Borrower credit profile, cash flow coverage, leverage, collateral base, covenant headroom, and repayment capacity. | Applicant credit profile plus transaction mechanics: documentary chain, performance triggers, counterparty risk, compliance risk, and reimbursement strength. |
| What gets monitored | Financial covenants, reporting, borrowing base (if asset-based), collateral audits, and usage patterns. | Documentary compliance, shipment and delivery parameters, discrepancy risk, expiry and presentation timelines, and reimbursement performance. |
| Typical risk to the bank | Direct credit exposure to the borrower for funded drawings. | Contingent exposure that becomes funded if documents comply and payment is made; reimbursement risk then sits with the applicant. |
| Pricing drivers | Borrower risk, collateral quality, tenor, covenants, and market conditions. | Applicant risk, tenor, documentary complexity, country and counterparty risk, and the bank’s policy appetite for the underlying trade. |
| Where declines happen | Weak cash flow coverage, leverage constraints, poor collateral quality, covenant pressure, or limited credit history. | Weak reimbursement strength, high compliance friction, unclear documentary chain, elevated country or counterparty risk, or poorly drafted conditions. |
Credit teams think of a line of credit as corporate liquidity. They think of Letters of Credit as transactional risk plus reimbursement exposure.
What a line of credit is used for
A line of credit, often structured as a Revolving Credit Facility, is typically used to manage working capital variability and general liquidity needs. It may also be structured as an asset-based facility with borrowing base mechanics tied to eligible receivables and inventory.
- Seasonal working capital swings and operating liquidity management.
- Funding inventory build-ups before collections convert to cash.
- General corporate purposes within permitted use-of-proceeds.
- Asset-based structures where availability is tied to collateral eligibility tests.
What a Letter of Credit is used for
A Letter of Credit is used to manage payment risk and performance risk between counterparties, particularly when parties do not have a long-standing relationship or operate across borders.
- Import and export transactions where the seller wants payment certainty and the buyer wants documentary performance.
- Commodity and goods trades requiring documentary discipline and bank intermediation.
- Transactions where a beneficiary requires bank-backed payment conditions before releasing goods or services.
Documentary Letter of Credit
A Documentary Letter of Credit supports payment against compliant documents, typically linked to shipment, title, insurance, and presentation timelines.
Standby Letter of Credit
A Standby Letter of Credit is commonly used as credit support. It is typically drawn if the applicant fails to perform or pay under an underlying obligation.
Can they be used together?
Yes, and sophisticated borrowers often do.
A Revolving Credit Facility may provide general liquidity, while a sublimit within that facility supports Letters of Credit issuance. Banks often allocate a portion of the line to Letters of Credit because an issued Letter of Credit consumes credit capacity, even if it is contingent until drawn.
In trade-driven businesses, the structure can also invert: a borrowing base or trade-linked facility provides liquidity while Letters of Credit manage payment mechanics at specific points in the trade cycle.
What you should prepare before you apply
Submissions fail when borrowers bring the wrong evidence to the wrong underwriting lens.
For a line of credit
- Audited or management financials, cash flow narrative, and leverage profile.
- Working capital cycle analysis and clear use-of-proceeds.
- Collateral schedules where applicable, and reporting capability.
- Covenant comfort and a realistic view of headroom through cycles.
For a Letter of Credit
- Underlying contracts, Incoterms, documentary requirements, and timelines.
- Counterparty profile and route risk framing, including compliance readiness.
- Draft instrument terms that are precise and examinable.
- Reimbursement plan and evidence the bank can rely on.
How long does it take?
Timelines depend on readiness and compliance friction.
- Lines of credit: often several weeks to a few months, depending on financial diligence, covenant negotiation, collateral perfection, and internal approvals.
- Letters of Credit: issuance can be fast once a facility and onboarding are in place. First-time onboarding and structure alignment typically drive timelines, not the printing of the instrument.
The fastest path is to align the request to the right product and submit a lender-ready pack the first time.
FAQ
Is a Letter of Credit “cash”?
No. It is a conditional payment undertaking. It is not a cash transfer, and it is not the same as a funded line draw. It becomes funded only if a compliant presentation is made and the bank pays.
Does a Letter of Credit reduce my line of credit availability?
Often yes. Many banks treat Letters of Credit as using credit capacity, usually through an issuance sublimit or by reducing revolver availability.
Can a bank decline an LC even if I have a line of credit?
Yes. Product policy, compliance appetite, counterparty risk, documentary complexity, and route risk can still trigger a decline even when the borrower has general borrowing capacity.
Which one should a trader request?
If the objective is to finance working capital broadly, a Revolving Credit Facility or borrowing base structure is the starting point. If the objective is to provide payment assurance to a counterparty based on documents, a Letter of Credit is the correct instrument. Many trade businesses use both.
If you are structuring a trade-driven facility or need Letters of Credit to support transactions, the submission must match how banks underwrite and monitor. Share your use case and documentation status to receive a quote.
Request A QuoteDisclosure. This content is for informational purposes and does not constitute investment, legal, tax, or financial advice. Any facility or instrument is subject to regulated counterparty approvals, documentation, and compliance requirements.
