LC Discounting Explained: Process, Rates, and How It Works in India

What is LC discounting?

LC discounting is a post-shipment financing arrangement where a bank advances funds against an irrevocable letter of credit issued by your buyer’s bank, before the LC matures. Instead of waiting 60–120 days for the issuing bank to pay, you get most of the LC value today and the discounting bank collects the full amount at maturity.

The key difference from factoring is what backs the deal. Factoring leans on the buyer’s credit and the local factoring market; LC discounting leans on a bank’s promise to pay. That makes it the natural product in trade corridors where factoring coverage is thin but confirmed LC liquidity exists.

Whether LC discounting is available for your buyer comes down to the issuing bank and the buyer’s country. Trad’s buyer financing checker shows LC discounting coverage for 194 markets, so you know before you negotiate terms.

How LC discounting works

The flow starts with an irrevocable letter of credit and ends with your bank collecting at maturity. Here is the sequence.

1. Your buyer arranges an irrevocable letter of credit from their bank.
2. You ship the goods and present the LC plus shipping documents to your bank.
3. The bank verifies the documents are compliant (no discrepancies).
4. The bank advances most of the LC value to you, minus a discount margin.
5. At maturity, the bank collects from the LC issuing bank and settles the balance.

Discrepancies matter. If the shipping documents do not match the LC terms, the issuing bank can refuse payment, which makes the LC far harder to discount. Clean, compliant presentations are the foundation of smooth LC discounting.

What does LC discounting cost?

LC discounting is priced as an annual percentage on the LC value over the tenor, plus fees. The table below shows the components you will typically see — treat the ranges as indicative, because exact pricing is quoted per deal.

LC discounting: a worked example

Say your buyer’s bank issues an irrevocable LC for ₹50,00,000 with a 90-day tenor, and your bank quotes an indicative discount margin of 10% per annum. The discount is roughly ₹1,23,288 (₹50,00,000 × 10% × 90/365), so you would receive an advance of about ₹48,76,712 — before other charges.

Illustrative and simplified: real quotes factor in the issuing bank’s rating, the currency, country risk and any confirmation fees. The principle holds — the longer the tenor, the more the discount eats into the advance, so shorter-tenor LCs are cheaper to discount.

Confirmed vs unconfirmed LC

A confirmed LC adds a second bank’s guarantee — usually a bank in your country — that payment will be made even if the issuing bank cannot. Confirmation makes discounting safer and often cheaper to price, but you pay a confirmation fee.

• Confirmed LC: two banks stand behind payment. Easier to discount, clearer pricing, but confirmation fees apply.
• Unconfirmed LC: only the issuing bank promises payment. Discountable in many corridors, priced on the issuing bank’s risk.

For very high-risk markets, a confirmed LC is frequently the only way to get discounting at reasonable rates.

When to use LC discounting

• Your buyer can only work on LC terms, and you do not want to wait for maturity.
• Your buyer’s country has limited factoring coverage but active LC confirmation.
• The LC is issued by a bank with solid standing — the price improves with the bank, not just the country.
• You want a post-shipment facility backed by a bank promise rather than buyer credit.
• Less ideal: small LC values where fixed fees eat the margin, or LC issuing banks in highly risky jurisdictions.

If you are unsure whether factoring or LC discounting fits your buyer, check the buyer’s country first — trad shows both products and a recommendation across 194 markets.

LC discounting in India

Indian banks discount export LCs under the Uniform Customs and Practice for Documentary Credits (UCP 600) framework, and pricing conventions are set by FEDAI. Discounted proceeds are export realisations that must be reported under RBI’s EDPMS, with your e-BRC or FIRA serving as proof of realisation.

Your export compliance obligations do not change because you discounted the LC — you still need the same realisation documentation. LC discounting just gets the cash to you earlier.

Frequently asked questions