Letter of Credit in Commodity Trade: LC & SBLC Explained

Why Letters of Credit Matter in Commodity Trade

In a typical commodity deal, the exporter does not want to ship the goods until payment is secure, while the importer does not want to pay until the goods are shipped. A letter of credit resolves this standoff. It is an irrevocable undertaking by the issuing bank to pay the exporter against documents that strictly comply with the LC terms — independent of any dispute over the goods themselves.

For a Brazilian exporter selling ICUMSA 45 sugar to West Africa, soybeans to China, or coffee to the Middle East, this is decisive. The exporter substitutes the credit risk of an unknown overseas buyer for the credit risk of a bank. A confirmed LC goes one step further: a second bank — usually on the exporter's side — adds its own guarantee, removing issuing-bank and country risk. That is what makes it possible to trade confidently with higher-risk markets.

"The letter of credit is the single most important risk-mitigation tool in international commodity trade — it turns a promise to pay into a banking obligation." — ICC Trade Finance guidance, UCP 600

The Parties to a Letter of Credit

A documentary credit involves several parties, each with a defined role. Understanding who does what is essential to managing an LC transaction smoothly.

Types of Letter of Credit — and LC vs SBLC

Letters of credit come in several variants, each suited to a different trade structure. Below are the types most relevant to commodity trade.

LC vs SBLC. A commercial (documentary) LC is the primary payment mechanism: the bank expects to pay against shipping documents in the normal course of the deal. A Standby Letter of Credit (SBLC) is different — it is a guarantee or backup that the bank pays only if the applicant defaults on its obligation. The SBLC is meant never to be drawn; it sits behind another payment arrangement as security. Commercial LCs are governed by UCP 600, while SBLCs are governed by ISP98 (or UCP 600). In short: a commercial LC is how the exporter normally gets paid, whereas an SBLC is a safety net that activates only on non-performance.

How an LC Works — Step by Step

A documentary credit follows a defined sequence from contract to payment. Here is the typical flow for a commodity shipment:

1. 1
   Sales contract & Incoterms agreed

   Buyer and seller sign a sales contract specifying the commodity, quantity, price, Incoterm (CIF and CFR are common with LCs) and that payment will be by irrevocable letter of credit.
2. 2
   Buyer applies to the issuing bank

   The applicant (buyer) instructs its bank to open the LC, providing the terms, amount, list of required documents and expiry date in line with the contract.
3. 3
   LC issued & advised (SWIFT MT700)

   The issuing bank transmits the LC, typically by SWIFT MT700, to the advising bank in the exporter's country, which authenticates and advises it to the beneficiary.
4. 4
   Exporter ships the goods

   The exporter checks the LC terms carefully, ships the cargo within the latest shipment date, and obtains the transport documents (clean on-board Bill of Lading and others).
5. 5
   Exporter presents compliant documents

   The beneficiary presents the full set of documents to the nominated bank within the presentation period and before the LC expiry.
6. 6
   Bank examines under UCP 600

   The bank checks the documents for strict compliance with the LC terms, applying UCP 600 and the ISBP standards for document examination.
7. 7
   Payment / negotiation

   If documents comply, the nominated or confirming bank pays, accepts or negotiates — at sight or at maturity for a usance LC.
8. 8
   Reimbursement

   The issuing bank reimburses the paying bank (often via a reimbursing bank under URR 725) and releases the documents to the applicant so it can collect the goods.

Documents Required Under a Commodity LC

Payment under an LC depends entirely on documents — not on the goods. The exporter must present exactly what the LC calls for. A typical commodity LC requires the following:

Common Discrepancies and How to Avoid Them

A large share of first presentations under letters of credit are rejected by banks for discrepancies. A discrepancy is any mismatch between the documents and the LC terms — and even a minor inconsistency can delay or block payment. Banks examine documents strictly: if they do not comply on their face, the bank is entitled to refuse them.

The most common discrepancies are:

• Data mismatches — names, amounts or quantities differ between documents.
• Late shipment or late presentation — shipping or presenting after the LC deadlines.
• Expired LC — documents presented after the credit expiry date.
• Inconsistent descriptions — the goods description differs from the wording in the LC.

The remedy is exact compliance. Read the LC the moment it arrives, check every requirement against your ability to comply, and request an amendment before shipping if any term is wrong or impossible to meet. Prepare documents so that they exactly mirror the LC wording, and present well before expiry.

Structured LCs & Commodity Trade Finance

Trading houses combine LC variants into structured solutions. A transferable LC lets a trader pass part of an incoming credit to the real supplier, while a back-to-back LC uses the buyer\'s LC as security to open a matching credit in favour of the supplier — financing a deal with little capital of its own. Revolving LCs are ideal for repeat soybean or sugar shipments, reinstating automatically so a fresh LC is not needed for each cargo. Pre-export finance and red-clause advances help fund production and logistics before the goods leave port.

In Brazil, exporters routinely use ACC (Adiantamento sobre Contrato de Câmbio) and ACE (Adiantamento sobre Cambiais Entregues) financing to obtain working capital against export contracts and shipped documents. Major banks — Banco do Brasil, Itaú, Bradesco and Santander — handle the issuance, advising and confirmation of export LCs and provide the trade-finance lines that keep Brazilian commodity exports moving.

Frequently Asked Questions