Why Letters of Credit (LCs) Still Rule Global Trade Finance

Did you know over a third of global trade finance is facilitated through Letters of Credit? LCs are the workhorses of trade finance, accounting for about 32.1% of the market in 2025. Whether you’re an SME exporter, a sugar buyer trying to hedge price volatility, a logistics manager moving goods, a finance professional structuring deals, or an investor seeking safe profits – understanding why LCs dominate global trade can help you trade smarter and more securely. LCs have stood the test of time because they solve the fundamental problem in cross-border commerce: trust. In this newsletter-style feature, we’ll break down how LCs build trust, compare them briefly to SBLCs/DLCs, and show how to use them effectively (with real examples). If you find these insights useful, be sure to stick around for a special offer at the end to keep you updated on trade finance best practices! 🚀

LCs vs SBLCs vs DLCs: Why Letters of Credit Lead

Not all “letters of credit” are equal. In trade finance, the term Letter of Credit (LC) usually refers to a documentary letter of credit (DLC) – a bank’s promise to pay the seller once shipping documents prove the goods were sent. It’s a primary payment instrument for goods trade. By contrast, a Standby Letter of Credit (SBLC) is more like a safety net – a guarantee used only if the buyer fails to pay or perform. Think of a DLC as the main act and an SBLC as the backup plan. For example, an SBLC might back a construction contract or advance payment, only kicking in if something goes wrong, whereas an LC (DLC) pays out on shipment of goods against compliant documents. This difference in purpose explains why documentary LCs are far more widely used in day-to-day trade – they directly facilitate payment, giving sellers quick assurance of funds. In fact, documentary LCs are common in commodity shipments (like sugar exports) where sellers demand a bank-backed guarantee of payment upon shipment. SBLCs serve important roles (e.g. guaranteeing performance or loan repayment), but in global trade of goods, the LC is the undisputed king.

Why does this matter? If you’re an exporter wondering whether to request an LC or an SBLC from a buyer, consider your goal: If you need to ensure you get paid for goods shipped, an LC (subject to UCP 600 rules) is usually the way to go. SBLCs (often governed by ISP98 rules) are great as fallbacks or guarantees, but they don’t put cash in your hand for a shipment unless the buyer fails to pay. That’s why LCs dominate – they are purpose-built to enable trade payments, not just insure against defaults.

Mitigating Risk and Building Trust in Cross-Border Deals

At its core, a Letter of Credit is a bridge of trust between buyers and sellers who may never have worked together and operate in different countries. With an LC in place, the seller is protected from the buyer’s credit risks, because the issuing bank guarantees payment. Essentially, the bank’s creditworthiness replaces the buyer’s – if the buyer can’t pay or refuses, the bank must still pay as long as the seller met the LC terms. This assurance is golden for exporters. No more sleepless nights worrying if a new overseas customer will actually pay!

Just as crucially, modern LCs are irrevocable (in fact, under UCP 600 they’re considered irrevocable unless stated otherwise). This means once the LC is issued, the buyer’s bank cannot unilaterally cancel or change it without agreement. The terms are locked in, so you won’t wake up to a nasty surprise that your payment guarantee disappeared. For the buyer, an LC provides confidence that the seller will only get paid after shipping the goods as agreed – if the seller fails to ship or sends the wrong products, the bank won’t pay. This balance of security makes LCs a trusted mechanism for both sides.

Real-World Example: A mid-sized machinery exporter in Europe negotiated a sale to a new buyer in Asia. The seller wisely insisted on an irrevocable LC. Sure enough, the buyer later got cold feet about the purchase when market prices shifted – but it was too late to back out. The LC’s terms obligated the bank to pay once the shipping documents were in order. The exporter shipped on time, presented the documents, and got paid in full despite the buyer’s hesitations. Without the LC, that payment might have been in jeopardy. Countless exporters have similar stories of deals saved by the LC – it’s the ultimate peace-of-mind tool in volatile trade relationships.

Thriving in Volatile Markets: LCs as a Safe Harbor

Global trade has been anything but calm in recent years – from tariff wars to pandemic disruptions and geopolitical conflicts. One reason LCs continue to dominate is their proven reliability in volatile environments. When uncertainty rises, companies big and small turn to the certainty of letters of credit. In fact, experts predict a resurgence of the traditional LC in response to new tariffs and regulations, as businesses seek more secure terms. Unlike open-account terms (essentially shipping on a handshake promise to pay later), an LC forces discipline and accountability into the transaction.

Consider the 2024–2025 period: supply chain shifts and sanctions reshaped trade flows, and many traders found that having an LC was the only way to keep goods moving. The International Chamber of Commerce notes that despite growth in other financing methods, documentary trade (LCs and similar instruments) remains a core component of trade finance and is expected to stay that way well into the 2050s. The numbers tell the story: while newer methods like supply chain finance grew, documentary LCs still made up roughly 40% of trade finance revenues heading toward 2030.

For SME exporters and commodity players (like those shipping sugar or grains), this is especially relevant. When commodity prices swing wildly, trust can erode – a buyer might be tempted to cancel if the market moves against them. But if an LC is in place, both parties are locked into a framework that mitigates that risk. As one trade finance veteran quipped, “In choppy waters, an LC is your lifeboat.” It’s no surprise that in regions or industries with higher political or credit risk, LCs are the go-to instrument to ensure deals don’t fall apart. In short, LCs provide a safe harbor when the business climate gets stormy.

Best Practices: Using LCs Effectively (and Avoiding Pitfalls)

Letters of Credit are powerful, but to unlock their full benefits you need to handle them correctly. Poorly structured LCs or rookie mistakes in drafting can lead to disputes or even non-payment – defeating the purpose of using an LC! Here are key best practices to make your LCs smooth and “bankable”:

• Stick to UCP 600 (or the right ICC rules): Always indicate that the LC is subject to the ICC’s UCP 600 rules (latest version) for documentary credits. This globally recognized rulebook provides a safety net of definitions and procedures, ensuring any bank or court will interpret the LC consistently. (For SBLCs, use ISP98; don’t mix rule sets in one instrument.) Using UCP 600 isn’t just a formality – it hardwires in protections like timeframes for the bank to examine documents and how to give valid notice of discrepancies. It basically prevents a lot of headaches by codifying standard practice.
• Demand “Irrevocable” LCs and Avoid Soft Clauses: By default, LCs under UCP 600 are irrevocable, but it’s worth double-checking this in the credit. An irrevocable LC means the bank must honor it as issued – it can’t be revoked on a whim. Just as important is scrutinizing the terms for any “soft clauses”. Soft clauses are sneaky conditions that give the buyer (applicant) undue control over payment, such as “payment subject to buyer’s written approval” or “funds released upon buyer’s receipt of goods”. These clauses give the buyer or issuing bank a veto at payout and should be avoided. They are red flags because they undermine the independence of the LC. Unfortunately, some inexperienced or unscrupulous parties insert soft clauses intentionally to delay or dodge payment. Lesson: If you see wording that requires the buyer’s further approval or any action outside presenting standard documents, push back. As one expert guide puts it, “The fastest way to break an LC is to add soft clauses that cannot be proven with documents, like ‘quality acceptable to buyer’ or ‘buyer confirmation required.’” Keep conditions objective and tied only to documents the bank can verify.
• Draft Clear, Precise Terms (No Ambiguity!): An LC is only as good as its wording. Vague or overly complex language creates room for confusion and disputes. Define every requirement precisely – if a term can be interpreted two ways, rewrite it so it’s crystal clear. For example, instead of saying “fast shipment in late July,” say “Latest shipment date: July 31, 2025, as per onboard bill of lading.” List exactly which documents are required (e.g. commercial invoice, bill of lading, insurance certificate, etc.) and make sure each serves a purpose. Importantly, don’t demand documents or actions the seller can’t control. The bank examiner should be able to read the LC and know exactly what documents to expect and when to pay – put yourself in their shoes during drafting. Ambiguity is the enemy: as advisors often say, “Define terms precisely. Ambiguity creates disputes and delays.”
• Align the LC with the Sales Contract & Incoterms: A common mistake is inconsistencies between the contract and the LC. If your sales contract says FOB Shanghai, for example, ensure the LC’s terms (latest shipment date, port of loading, required documents like an on-board BL) all align with that. If partial shipments are allowed in the contract, the LC should not forbid them. Mismatches lead to discrepancies, which lead to non-payment. The best practice is for seller and buyer to coordinate on the LC application in advance – many exporters actually provide a draft LC format or checklist to the buyer to give to their bank, to avoid errors. Consistency upfront saves time and prevents costly amendments later.
• Triple-Check the Details (Names, Dates, Numbers): The majority of LC presentation failures happen due to small, avoidable errors. In fact, most LC discrepancies are basic: wrong spelling of a name, inconsistent cargo descriptions between documents, missing signatures or dates, math errors in amounts, etc.. Any misspelling or minor discrepancy can cause delays or even give a bank an excuse to refuse payment. So, be meticulous: the beneficiary name and address must exactly match on all documents; quantities and prices should align perfectly with the LC; if the LC calls for “Certificates of Origin”, make sure you have them in the precise format. Pro tip: use the ISBP (International Standard Banking Practice) guide as a reference for how banks typically interpret document compliance – it’s like a cheat sheet to avoid common traps. A little extra diligence before presentation can save weeks of delay correcting discrepancies.
• Choose Reputable Banks and Add Confirmation if Needed: An LC is only as good as the bank standing behind it. If you’re an exporter and the LC is issued by a small or unfamiliar bank in your buyer’s country, do your due diligence. If there’s any doubt, request a confirmation by a top-tier international bank. A confirmed LC means a second bank (usually your local or a global bank) adds its guarantee to pay you – so even if the issuing bank or country has issues, you still get paid. Yes, confirmation costs a fee, but it’s often well worth the peace of mind. A confirming bank shields you from both credit risk and political risk (e.g. if the issuing bank’s country imposes currency controls, the confirming bank will still pay in your currency). Best practice: for any significant export LC, if the issuing bank isn’t a first-class institution or if their home country is unstable, insist on confirmation. It’s like getting a second parachute before you jump.

By following these best practices – using the right rules, keeping terms strict but fair, and avoiding pitfalls – you greatly increase the chance that your LC transaction will go through without a hitch. As trade finance experts like to say, an LC is a beautiful instrument when it works as intended. The goal is to structure it so that it works every time for you.

The Digital Future: Faster, Smarter, and More Secure LCs

Letters of Credit may be a decades-old concept, but they’re not stuck in the past. In fact, digital innovation is supercharging LCs, making them faster and easier to use in the 2020s. Gone are the days of paper documents couried across the world for presentation – leading banks and fintech consortia have been rolling out electronic LC platforms that cut processing times dramatically. For example, blockchain-based trade networks like Contour have shown they can reduce LC processing time by up to 90%. In one 2023 pilot, what normally took 5–10 days of back-and-forth with paper was completed in under 3 hours on a digital platform! That means exporters got paid in hours after shipment instead of weeks.

How is this possible? Digital LCs leverage shared platforms where the importer, exporter, banks, and even carriers can submit and verify documents electronically in real-time. No more waiting for physical documents to arrive or manual data entry at each step. This not only speeds things up but also reduces errors (since data can be validated automatically). As one trade finance head at Citi put it, the priority is to “simplify trade processes and reduce transaction time” by eliminating paper-heavy workflows. And it’s not just blockchain – even traditional channels now use electronic documentation via standards like eUCP (electronic supplement to UCP 600) and secure digital document transfer systems.

What does this mean for you? Digital LCs can combine the best of both worlds: the trust and security of a letter of credit with the speed and convenience of modern tech. Imagine being a logistics manager who can upload a scanned bill of lading to a portal and trigger the LC payment on the same day, rather than rushing documents to a bank across the globe. Or a finance professional who can track an LC’s status online 24/7. This is increasingly reality. Major banks are teaming up on digital LC networks, and adoption is growing each quarter.

Moreover, digital LCs pair perfectly with confirmation services. A confirming bank can also participate digitally, meaning an exporter could have a confirmed, electronic LC where a top bank’s guarantee is in place and all documents flow through a secure platform. This virtually eliminates the traditional pain points (delays, lost documents, ambiguous communications). In short, technology is making LCs not only safer but faster and more user-friendly – addressing the few complaints traders historically had about LCs (like complexity and time).

Keep an eye on this space: if you’re not already exploring digital LC options, now’s a good time. Early adopters are cutting their trade finance processing times from days to hours, which can be a real competitive edge. As global commerce continues to digitize, LCs are evolving, ensuring they’ll remain a dominant force in trade finance for years to come.

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Letters of Credit clearly offer unmatched benefits in global trade – risk mitigation, trust, scalability, and now speed – especially when used correctly. They dominate trade finance for good reason, and they can empower your business to expand globally with confidence. The key is knowing how to leverage LCs and other instruments to your advantage. This is where we come in!

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Sources:

1. Coherent Market Insights – Trade Finance Market Analysis (2025), showing Letters of Credit holding 32.1% market share and their role in reducing counterparty risk.
2. Financely Group – “SBLC vs DLC: Which Letter of Credit Is Right for Your Deal” – explains that documentary LCs are primary payment instruments for goods, whereas SBLCs act as contingent guarantees.
3. International Chamber of Commerce (ICC) via GTR – noted that 2025 may see a resurgence of traditional LCs amid tariff disruptions, and documentary trade remains a core component of trade finance into the future.
4. UNCTAD Trade Finance Guide – affirms that under an LC, “the seller is protected from buyer credit risks as the issuing bank provides a guarantee of payment” (and LCs are considered irrevocable by default).
5. UNCTAD / ICC Guidance – warns that any discrepancy or misspelling in an LC can be used as an excuse for non-payment, highlighting the importance of precise drafting.
6. Financely Group – UCP 600 Guide – advises that soft clauses (e.g. “buyer approval required”) will break an LC and should be avoided; keep LC conditions objective and easily proven by documents.
7. Investopedia – Confirmed Letter of Credit – explains that adding a confirming bank guarantees payment even if the issuing bank fails, reducing default risk for sellers.
8. PYMNTS Report (2023) – describes a blockchain-based LC transaction where processing time was cut by 90% (from 5–10 days to 3 hours) using a digital platform, illustrating the speed gains with e-LCs.
9. Comparative Trade Finance Report (2025) – detailed best practices like using UCP 600, avoiding soft clauses, aligning LCs with contracts, and confirming with strong banks to ensure LC transactions are dispute-free and enforceable. (These insights are reflected throughout our Best Practices section.)