Types of Letters of Credit and Guarantees

• Documentary Import LC: Payment commitment on presentation of shipping documents.
• Documentary Export LC: Exporter-side facility, often negotiated or forfaited for cash flow.
• Standby Letter of Credit (SBLC): Backstop payment instrument for trade, project finance or obligations.
• Performance Guarantee LC: Ensures contractor performance under turnkey or service contracts.
• Bid Bond LC: Guarantees proposal validity in tenders and public-sector bids.

Core Cost Components Across LC Types

• Issuance Fee: 0.10–0.50 percent of face value, payable to the issuing bank.
• Confirmation Fee: 0.10–0.30 percent when a confirming bank adds its guarantee.
• Amendment & Discrepancy Fees: USD 50–150 per change or per document review.
• SWIFT Messaging: USD 30–50 per MT 700/760 instruction.
• Collateral Funding: Interest on margin (10–30 percent of LC value) priced at reference rate plus 1–3 percent.
• Claim Commission: 0.05–0.20 percent on standby or performance draws.

Pricing Variations by LC Category

• Import & Export LC: Issuance and confirmation fees dominate; negotiation fees rise with document complexity.
• SBLC: Higher issuance margins (0.25–0.60 percent) reflect drawdown risk; claim commission applies if drawn.
• Performance Guarantee: Fees of 0.30–0.75 percent cover longer tenors and contractor default risk.
• Bid Bond LC: Lower fees (0.05–0.20 percent) for short-term guarantees on tender participation.

Key Drivers of LC Pricing

• Beneficiary Risk: Emerging-market suppliers or jurisdictions trigger higher confirmation premiums.
• Tenor: Longer usance or performance periods increase funding charges on collateral.
• Currency: Non-major currencies incur additional bank handling fees.
• Facility Size: Larger commitments may earn volume discounts; small LCs carry flat minimum fees.
• Document Complexity: Multiple certificates or non-standard terms drive up amendment and review costs.

Strategies to Manage Letter of Credit Costs

• Consolidate Facilities: Use revolving or seasonal LC lines to cover multiple shipments under one limit.
• Collateral Alternatives: Pledge rated securities or secure third-party guarantees to lower cash margin.
• Avoid Unnecessary Confirmations: Limit confirming banks when beneficiary credit is strong.
• Standardize Documents: Adopt uniform invoice and certificate templates to cut amendment fees.
• Negotiate Tiered Pricing: Leverage transaction volumes to secure reduced issuance and confirmation rates.

Frequently Asked Questions on LC Costs

Which fee is largest?
For import/export LCs, issuance and confirmation fees usually account for 70–80 percent of total cost.

Can I finance the margin?
Yes. Specialist lenders and bank credit lines can fund collateral at competitive spreads.

How do standby and performance fees compare?
SBLC and performance LCs carry higher margins (0.25–0.75 percent) reflecting invocation and contractor risk.

Do banks offer discounts?
Large or repeat-volume clients often negotiate 10–20 percent fee reductions.

Disclaimers & Important Considerations

FG Capital Advisors offers advisory and arrangement services only. LC fees and financing rates depend on bank underwriting, regulatory requirements and collateral terms.

Clients should seek independent legal, trade compliance and tax advice to review LC documents, jurisdictional risks and customs regulations before proceeding.