Notice. FG Capital Advisors is a trade and capital advisory firm. We provide financial modelling, analytical support, and sponsor side advice around letters of credit and related trade structures. We are not a bank, lender, credit insurer, broker dealer, or retail investment adviser and do not issue letters of credit or act as an arranger for regulated products. Any LC, guarantee, or loan is provided by regulated counterparties under their own licences and documentation. All potential transactions are subject to KYC and AML checks, sanctions screening, credit and investment committee decisions, independent legal and tax advice on your side, and formal agreements with those regulated entities.
Letter Of Credit For Commodity Trading
Commodity flows live and die on documents. A well structured letter of credit gives producers and traders payment certainty, unlocks bank lines, and turns cargoes into financeable collateral. A poorly structured LC adds friction, traps margin, and leaves real risk on your book.
FG Capital Advisors helps traders, producers, and offtakers design LC backed trade structures, prepare bankable files, and negotiate terms with banks and counterparties so letters of credit support your trading strategy instead of constraining it.
Request LC Structuring SupportWhere Letters Of Credit Fit In Commodity Trading
In commodity markets, letters of credit governed by UCP600 are still one of the most widely accepted tools for managing performance and payment risk between counterparties that may never meet in person. They sit at the intersection of logistics, credit, and documentation.
- Producers and exporters use LCs to secure payment for crude, refined products, metals, soft commodities, and agri flows against compliant shipping documents instead of pure buyer credit risk.
- Traders rely on LCs and confirmations to bridge risk between origin and destination markets, often discounting LC receivables to fund freight and inventory.
- Refiners, crushers, mills, and industrial buyers use LCs to secure performance from suppliers and to match payment obligations to their own working capital cycles.
- Banks and private credit funds look at LC backed flows as a way to lend against self liquidating exposures tied to real cargoes rather than unsecured balance sheet risk.
The mechanics are straightforward on paper. In practice, LC structures for commodity trades need to reflect Incoterms, shipping routes, warehousing, quality and quantity risks, sanctions filters, and the credit appetite of each bank in the chain.
Types Of Letters Of Credit We See In Commodity Deals
Different trade patterns need different LC formats. We regularly work on structures that involve:
- Sight letters of credit where payment is made upon presentation of compliant documents, commonly used for spot or short dated shipments.
- Usance letters of credit with deferred payment terms, giving buyers time to sell or process the cargo before settling, while sellers can discount proceeds with their banks.
- UPAS (usance payable at sight) LCs where the issuing bank grants term to the applicant, while the exporter receives sight payment from the confirming or nominated bank.
- Transferable and back to back LCs used by traders that sit between producers and end buyers, allowing them to pass LC support down the chain without revealing margins.
- Standby letters of credit that secure performance or payment obligations behind long term offtake, prepayment, or tolling arrangements.
Getting the structure right at term sheet stage is critical. LC type, tenor, confirmation, discounting route, and document list all drive how banks view risk and how much working capital is actually released to the trade.
How We Help Structure LC Backed Commodity Trades
Our work starts from your trade flows and counterparties, not from generic templates. We map the movement of goods, documents, and cash, then shape LC structures that work for both banks and commercial partners.
- Analysing existing trades and contracts to identify where LCs can replace open account exposure, reduce risk, or unlock better funding terms.
- Designing LC structures around Incoterms, shipping schedules, storage points, and quality and quantity risk allocation.
- Defining document presentations that protect you but remain realistic for ports, inspectors, and logistics providers to produce on time.
- Building models that show how LC flows impact cash, limits, margins, and returns for both borrower and lender under different scenarios.
- Supporting discussions with banks and private credit funds on LC availability, confirmation, discounting, and potential borrowing base or pre export overlays.
Where required, we can help harmonise LC structures across several counterparties so your book is easier to fund and monitor at portfolio level instead of on a purely trade by trade basis.
Typical Use Cases And Clients
We support a range of commodity segments and client types where letters of credit are central to the business model.
- Independent traders that want to formalise LC backed borrowing base or pre export structures with their core banks and private lenders.
- Producers and processors in oil and refined products, metals and concentrates, and soft commodities that are moving from domestic to cross border flows.
- Groups consolidating several trading entities or books under a single LC backed platform or fund structure for external investors.
- Buyers in emerging markets that need LC support from global banks or confirmations to give exporters comfort on payment risk.
- Family offices and investors evaluating LC backed trade strategies and wanting clear numbers on risk, leverage, and drawdown mechanics.
In all cases, the objective is the same. Use letters of credit to improve risk and funding outcomes on real trades, rather than simply ticking a box for compliance or counterparties.
Managing Bank Risk, Confirmation, And Sanctions
LC flows in commodities often involve several banks across different jurisdictions. Issuing banks, confirming banks, discounting banks, and participating funds all have their own credit, sanctions, and country risk frameworks.
- We help sponsors think through which bank names and jurisdictions are acceptable to key counterparties and how that affects LC availability and pricing.
- We consider when to add confirmation or silent risk participation and how that changes capital usage for banks and private lenders.
- We flag typical pressure points around dual use goods, sanctions exposure, and high risk geographies that can slow or block LC issuance.
- We structure flows so documentary checks and sanction filters can be completed without blocking commercial timelines where possible.
The end result is an LC framework that is more likely to be acceptable to both compliance teams and front office desks across the chain.
Information We Usually Need To Review An LC Opportunity
To give a useful view on a letter of credit backed commodity trade, we need a clear picture of how the business actually runs. As a guide, we typically request:
- Historic shipment data by counterparty and route, including Incoterms, volumes, prices, margins, payment terms, and loss history.
- Copies of key contracts such as offtake agreements, supply contracts, storage and tolling agreements, and any existing LC or trade finance facility documentation.
- Details of current bank relationships, limits, security packages, and any issues you have faced on LC issuance, confirmation, or document discrepancies.
- Your target trade flows and facility size, including desired LC tenors, currencies, and whether you want discounting or UPAS structures.
- Basic financial statements for the main trading entities and, where relevant, sponsor or holding companies that support the group.
Where information is incomplete, we can still indicate options, but ranges on pricing, size, and structure will be broader until better data is available.
Engagement Scope And Fees
Our work on letters of credit for commodity trading is scoped and priced deal by deal. Fees depend on how complex the flows are, how many banks or lenders are involved, and whether we are supporting a single facility, several lines, or a platform level structure.
- Fixed fee mandates for LC structure review, modelling, and preparation of bank and investor materials for a defined set of trades or facilities.
- Broader mandates for traders or producers that want a consistent LC and trade finance blueprint across multiple counterparties, sometimes with a retainer for ongoing support.
- Where we assist with outreach to banks or private credit funds, a success linked component can apply, always documented in a written mandate and subject to applicable rules in relevant jurisdictions.
All commercial terms are set out in a written engagement letter before work begins, including scope, timelines, deliverables, and any success related elements.
If you are planning LC backed commodity trades or want to upgrade your existing LC structures, share a short description of your product mix, counterparties, routes, and current bank lines.
We will review the information and respond with an initial view on structure, documentation, and whether a formal mandate with FG Capital Advisors is appropriate to support your letter of credit strategy.
Submit Your LC Structuring RequestDisclosure. FG Capital Advisors provides financial modelling, analytical, and advisory services. We do not originate, offer, or sell securities, loans, deposits, guarantees, or insurance products and do not accept client money. Any letter of credit, guarantee, loan, or investment product referenced in our work is carried out by regulated entities under their own licences, terms, and documentation. Nothing on this page is a recommendation or a solicitation to enter into any transaction or to buy or sell any financial product. Any engagement with FG Capital Advisors is subject to internal approval, conflict checks, KYC and AML checks and sanctions screening where required, and the terms of a formal mandate or engagement letter.
