Notice. This page is informational and general in nature. Structure selection depends on counterparty risk, goods, Incoterms, jurisdiction, bankability, and documentary controls. Any outcome remains subject to underwriting, KYC and AML controls, sanctions screening, and definitive documentation.
Letters of Credit vs Supply Chain Finance
A letter of credit is a document-driven payment undertaking designed to protect performance and delivery risk. Supply chain finance is a working capital program designed to accelerate cash conversion inside an existing buyer-supplier relationship.
Both can fund trade. They solve different problems. This guide shows where each tool wins, where it fails, and how to choose based on control points, not buzzwords.
Book A ConsultationDefinitions That Matter in Execution
Letters of credit(often shortened to LC) are bank instruments where payment is triggered by compliant presentation of documents. The operational reality is simple: you get paid when your documents are correct and the bank undertaking is reliable.
Supply chain finance(SCF) is a buyer-led payables program. Suppliers can get paid early on approved payables, usually priced off the buyer’s credit profile and program rules. It works best when there is repeat trade, stable buyer approval, and clean dispute handling.
Internal reading: Trade Credit: Receivables, Payables Programs, LCs and Trade Finance vs Traditional Financing.
When a Letter of Credit Is the Better Tool
Use a letter of credit when the main issue is performance risk, payment certainty, and documentary control across borders, new counterparties, or higher-risk jurisdictions.
- New buyer or new corridor: you need a bank undertaking, not a promise.
- Documentary control is central: title, inspection, certificates, and shipment terms must be enforced through documents.
- Country and bank risk needs a solution: confirmation can shift risk away from the issuer.
- Seller needs early liquidity: usance structures can move trade without starving working capital.
Related internal reading: Letters of Credit (LC) Services , Confirmed vs Unconfirmed Letters of Credit , UPAS Letters of Credit , Letter of Credit for Commodity Trading.
When Supply Chain Finance Is the Better Tool
Use supply chain finance when the issue is working capital timing inside a repeat procurement program. SCF works when the buyer can approve payables cleanly and disputes are rare and controlled.
- Many suppliers, one strong buyer: the buyer’s approval is the engine of the program.
- Stable purchase and invoice cadence: program economics improve with repeat volume.
- Payment terms are stretching: SCF can protect suppliers while preserving buyer DPO goals.
- Operational reporting matters: onboarding, data feeds, and payment triggers must be tight.
Related internal reading: Commodity Supply Chain Finance , Commodity Trade Finance Services , FMCG Trade Finance.
Side-by-Side Comparison
| Dimension | Letters of Credit | Supply Chain Finance |
|---|---|---|
| Primary purpose | Payment certainty and performance control through documents | Working capital timing based on buyer-approved payables |
| Trigger | Compliant document presentation | Buyer approval of invoices or payables |
| Key risk focus | Issuer/bank risk, country risk, document discrepancy risk | Buyer credit, dispute process, program uptake and reporting |
| Best for | Cross-border trade, new counterparties, higher-risk corridors | Repeat procurement with a strong buyer and many suppliers |
| Cost drivers | Bank fees, confirmation, tenor, country/bank risk, document complexity | Discount rate linked to buyer credit, program fees, data and onboarding |
| Operational failure mode | Discrepancies delay payment or block negotiation | Invoice disputes or weak approvals stall early payment |
If the commercial chain has weak control points, letters of credit usually outperform. If the chain is stable and repeatable, supply chain finance often wins on speed and simplicity.
Some structures sit between letters of credit and supply chain finance. UPAS and deferred payment letters of credit can pay the exporter at sight while giving the importer time to repay, subject to bank terms. In practice, it is a way to keep shipments moving without forcing the buyer to prepay.
Internal reading: UPAS Letters of Credit and Letter of Credit Discounting.
Letters of Credit
- Discrepancy risk: payment depends on documents, not intent. Small errors become expensive.
- Wrong confirmation logic: exporter assumes issuer risk is fine, then learns it is not when stress hits.
- Weak control of amendments: commercial terms drift and the file loses coherence.
Supply Chain Finance
- Dispute handling is unclear: early-pay stalls because approvals are inconsistent.
- Buyer concentration is ignored: the whole program lives and dies on buyer credit and behavior.
- Reporting and onboarding are weak: limits exist on paper and fail in operations.
How Capital Providers Underwrite Each Tool
Underwriting is about enforceability and control points. For letters of credit, that means issuer quality, confirmation logic, rules, and document discipline. For supply chain finance, that means buyer acceptability, approval mechanics, dilution risk, dispute patterns, and data integrity.
Internal reading: Trade and Commodity Finance Structuring , Trade Finance Structuring , Trade Finance Distribution.
A Simple Selection Framework
- What is the risk you must eliminate? If it is payment and performance risk across counterparties, start with letters of credit. If it is cash cycle timing inside an established relationship, start with supply chain finance.
- Where is the control point? Documents and bank undertakings favor letters of credit. Buyer approvals and program reporting favor supply chain finance.
- What breaks first under stress? If disputes spike or approvals slow, SCF can stall. If documents are sloppy, letters of credit can stall.
FAQ
Is supply chain finance a replacement for letters of credit?
No. Supply chain finance works best when the buyer can approve payables cleanly and the trade relationship is stable. Letters of credit are built for documentary control and performance risk in trade execution.
Do letters of credit eliminate all risk?
No. They shift risk into documentary compliance and bank undertaking quality. If documents are wrong or the bank risk is misread, outcomes degrade fast.
When does confirmation matter?
When issuer or country risk is material, or when the seller needs payment certainty from a higher-grade bank undertaking.
What is the biggest operational risk in supply chain finance?
Disputes and inconsistent approvals. A program that cannot approve payables cleanly will not produce reliable early-pay.
Can both tools be used in the same supply chain?
Yes. Some chains use letters of credit for the cross-border leg, then use supply chain finance or receivables structures downstream once goods are delivered and invoices are approved.
What should I prepare before speaking to capital providers?
Contracts, counterparties, transaction flow, documentary requirements, bankability constraints, and a clean description of control points and cash conversion.
If you want a structure that survives execution, do not start with labels. Start with control points, documentary discipline, and a realistic cash cycle map.
Book a consultation to review your trade flow and select the instrument that fits the risk you actually need to remove.
Book A ConsultationDisclosure. This material is not legal, tax, accounting, or regulatory advice. Any trade finance structure depends on definitive documents, bank policy, and third-party approvals.
