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Letters of Credit

Explore more HSBC trade financing solutions to support your business.

Grow your trading relationships confidently with services provided by HSBC in relation to Documentary Credit (DC), also known as Letters of Credit, mitigating the payment risks associated with cross-border trade and improving your cash flow.

What is a Letter of Credit?

A Letter of Credit (LC) is an undertaking by a buyer’s bank to pay its suppliers for goods or services, subject to agreed conditions.

LCs are used extensively in financing of international trade because they offer assurance that both the parties will fulfil their obligations in the trade.

Key benefits

Compared to traditional methods, such as cash payments or wire transfers, issuing a letter of credit provides increased protection against the risks associated with cross-border transactions. They also ensure timely payment and facilitate easier access to working capital finance.

For buyers, Import LCs can help you secure your international purchases and give you the ability to negotiate better contract terms, such as increasing supplier’s credit period.

When you apply for an LC

you show your supplier you have the ability to pay for the goods
you are asking HSBC to provide payment security to your suppliers
you can tailor your expectations in respect of terms relating to shipping, delivery, insurance and quality inspection from your suppliers in the LC

For suppliers, Export LCs minimise export payment risk and provide easier access to financing without the need for a credit facility.

When you receive a letter of credit

you are getting a commitment from the buyer’s bank to pay you if your documents presented comply with the LC conditions
you can generally request for an advance of funds against compliant documents
you can mitigate your risk on the buyer’s bank by asking HSBC to add our confirmation to your LC

To meet your dynamic business needs, we offer competitive pricing for discounting your Export LC and offer various types of LCs(e.g. Transferable LCs) at HSBC offices across the globe.

Why HSBC?

As a leading international bank backed by a strong balance sheet, HSBC consistently manages large trade flows, holds a strong reputation, and is trusted by corporations globally.

A global footprint: We have the one of the largest network of bank relationships, and can support LCs between trade counterparties virtually anywhere and in multiple currencies.
Dedicated expertise: Our experienced on-ground teams manage your letter of credit processing and document checking processes efficiently.
Digital innovation: With our latest HSBC Trade Solutions (HTS), you will have real-time visibility of your transactions 24/7 and can streamline your processes of applying and managing DCs.
Fast turnaround: We can issue your letters of credit quickly, helping you to meet tight deadlines. Issuances can be against your facility with HSBC or on a fully cash-backed basis.

FAQ

How does a Letter of Credit work?

The Letter of Credit (LC) process starts with the buyer and seller in a trade agreeing on using LC as a payment method in the initial contract. The buyer then requests their bank to issue an LC.

The buyer’s bank issues the LC to the seller’s bank. Payment is only made once the goods have been shipped, and shipping documents, such as invoices and proof of transport, are presented in the manner as required in the LC.

Provided the relevant conditions stated in the LC have been met, the buyer’s bank makes payment or undertakes to pay on a future date, to the seller’s bank.

Are there different types of Letters of Credit?

Letters of Credit (LCs) can have different features and here are some of the common terminologies associated with Letters of Credit:

Irrevocable Letters of Credit – An Irrevocable LC cannot be cancelled or have their conditions changed unless every party involved agrees.

Sight Letters of Credit – A Sight LC means that as soon as the LC conditions are met, the buyer’s bank will have the obligation to pay within a reasonable period.

Usance Letters of Credit – An Usance LC means that supplier credit is embedded in the LC, called usance tenor, and that payment will be made at the end of the usance period after the relevant conditions are met.

Back-to-Back Letters of Credit – a Back-to-Back LC involves the issuance of two LCs, one where an intermediary is the beneficiary of an LC issued on behalf of their buyer, and one issued at the request of the intermediary to their seller.

This type of LC helps the intermediary leverage the LC issued in their favour to request the issuance of another LC and provides trade confidentiality.

Transferable Letters of Credit – A Transferable LC allow an intermediary to transfer their rights and obligations under the LC to the supplier.

This type of LC can be useful when the intermediary agent is unable to supply some or all of the goods stipulated in the LC and therefore wishes to transfer part, or all, of the credit.

What is the difference between a Letter of Credit and a Bank Guarantee/Standby Letter of Credit?

A bank guarantee or a standby letter of credit acts like a safety net for business transactions. It promises a specific payment to the beneficiary (seller or buyer) if the other party breaks the contractual obligations to ensure minimal impact on working capital.

While both Bank Guarantees and Letters of Credit are trade finance solutions that serve to mitigate risk while importing and exporting, an LC is a payment and risk mitigation tool, while the Guarantee is triggered in the event of “default”.

Payment under a compliant Letter of Credit is expected, and the bank takes on the obligation to pay the seller.

How can a business apply for the issuance or negotiation of a Letter of Credit?

The issuance, amendment and acceptance of HSBC Letters of Credit can be requested for via many of HSBC’s digital channels – the most common being via HSBCnet or at our local Trade Counter.

Our comprehensive suite of digital solutions that will help simplify applications and provide real-time visibility on your transactions.

With HSBCnet, your global and regional treasury and finance teams can have access to view your subsidiaries’ transactions and insights HSBCnet dashboards are customisable with widgets, trackers, notifications and alerts when action is due.

We have APIs for Import and Export Letter of Credit that helps you connect directly with us. Contact us

What are the documents that a Letter of Credit commonly call for?

How much does the confirmation of Letter of Credit cost?

Can HSBC handle the Letter of Credit end to end?

What can I do to avoid delays in my transactions?