Issuance Fee

How Much Does It Cost to Open a Letter of Credit?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees ,
letter of credit issuance fees

On this page, I will try to explain the letter of credit issuance costs, and the main factors that are effecting them.

Letter of credit is a secure payment method comparing to other payment options in international trade.

However, letter of credit has one clear disadvantage. It is expensive.

There are multiple banks in action in a letter of credit transaction, and each bank demands a fee for its each action.

Typical letter of credit fees demanded by banks are as follows:

  • Letter of Credit Issuance Fee: This is the amount demanded by the issuing bank to open a letter of credit.
  • Advising Fee: A type of letter of credit fee, which is demanded by the advising bank to advise the credit to the beneficiary.
  • Discrepancy Fee: The issuing bank discount a certain sum of money from the proceeds of the letter of credit, if the beneficiary has presented discrepant documents.
  • Confirmation Fee: This is the fee, that is taken by the confirming bank to adding its confirmation to the credit.
  • Amendment Fee: If the letter of credit is amended, the issuing bank and/or the confirming bank may demand amendment fees.
  • Handling Fee: Handling fees are collected by banks for a variety of reasons, such as sending swift messages, holding documents, set of photocopy documents not presented etc.
  • Reimbursement Fee: Reimbursement bank’s fee to settle the credit amount between issuing bank and the confirming bank or the nominated bank.

Letter of credit opening cost change case per case, as the costs associated with the letter of credit issuance are effected from various factors.

What are the Main Factors Effecting Letter of Credit Issuance Costs?

  • Issuing Bank Charges: Issuing a letter of credit is a commercial act and banks open L/Cs in order to make profit.
  • Letter of Credit Amount: Banks determine letter of credit issuance charges in percentage of the letter of credit amount. Higher the L/C amounts, higher the charges.
  • How Letter of Credit is Financed? Importers can finance the letter of credit amount either via cash or trade finance loans. Cash backed letter of credit is expected to be cheaper than the loan backed letter of credit.
  • Payment Term: As the payment period is getting longer, the letter of credit issuance fees are getting higher. The longer the payment due, higher the fees.
  • How Letter of Credit Charges are Shared Between the Importer and the Exporter: How total letter of credit cost is shared between the importer and exporter may differ from one letter of credit to another.

How Letter of Credit Charges are Shared Between the Importer and the Exporter

How Much Does It Cost to Open a Letter of Credit?

Example: A German food importer wants to import cacao from Ivory Coast via an at sight letter of credit.

The German importer applies his bank, which is Deutsche Bank, to open a letter of credit in favor of the exporter.

Deutsche Bank’s import letter of credit issuance cost can be found on this document.

Letter of credit amount is 100.000 Euro and the time between the issuance of the letter of credit and the payment to the exporter is 3 months.

The letter of credit is issued in irrevocable format and all fees outside of the Germany will be paid by the exporter.

Minimum letter of credit issuance cost to the importer for this example is 625 Euro. (Irrevocability fee 200 Euro + Issuance of a letter of credit fee 125 Euro + Acceptance of documents fee 300 Euro)

How to Deal with High Banking Commissions under Letters of Credit?

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , ,
high letter of credit fees and commissions

No matter how many advantages letters of credit have, they have one big disadvantage. They are expensive.

As a result, you should understand your costs before finalizing a letter of credit deal.

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price.

Letters of credit are one of the most expensive international payment methods available on the market.

As a result, exporters find themselves in a dilemma, when negotiating the terms of the business conditions.

Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.

What are the Main Letter of Credit Fees That Exporters Have to Pay?

It is really hard to answer this question. Because what rules say is different than what the daily practice dictates.

  • According to the Rules: The issuing bank must pay all banking commissions as per UCP 600, which is the latest ICC rules of documentary credits.
  • Real Life Situations: The applicant pays the letter of credit issuance charges, but all other l/c costs will be collected from the beneficiary.

Bank Commissions That Exporters Normally Have to Pay:

  • Courier Fee / Postage Fee
  • Advising Fee
  • Discrepancy Fee
  • Handling Fee / Negotiation Fee
  • Amendment Commission
  • Confirmation Fee
  • Reimbursing Bank Charges

Real Life Example :

I would like to share a real life bank commissions example below.

These bank fees were collected from a British exporter under a letter of credit transaction. As you can see, the exporter had to pay 487 GBP to the banks as letter of credit fees.

Total transaction amount was only 1890 GBP. Letter of credit fees comprised 25% of all transaction amount, and this is unacceptable.

letter of credit bank commissions
Figure 1 : Real life example of bank commissions under a letter of credit transaction.

Suggestions to Eliminate High Banking Commissions Under Letters of Credit Transactions for Exporters:

  • Suggestion 1: Do not use letters of credit in low value transactions. As a general rule of thumb, transaction amounts below 10.000 USD to 15.000 USD can be considered as a low value businesses. Try to use alternative payment methods, instead of letters of credit on these occasions.
  • Suggestion 2: Try to convince your customer, so that the letter of credit fees will be paid by the applicant. Remember, letter of credit rules are on your side.
  • Suggestion 3: The worst case scenario may be is that, you can not find an alternative payment option and your customer does not want to pay letter of credit charges, except for the l/c issuance costs. If this is the situation, then try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.

Letter of Credit Fees

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , , ,
Letter of credit fees

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Letters of credit have certain advantages as an international payment method.

If you have enough knowledge and expertise on letters of credit field, then you can use them wisely to get paid where no other payment method works.

No matter how many advantages letters of credit have, they have one big disadvantage.

They are expensive.

As a result, you should understand your costs, before finalizing a letter of credit deal.

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