What is trade finance?

Trade finance is the set of instruments — letters of credit, bank guarantees, bill/invoice discounting and export credit — that let buyers and sellers transact across the gap between shipping goods and receiving payment, with a bank pricing the counterparty and timing risk.

How much does a letter of credit cost in India?

An LC is priced as a commission on its value, usually charged per quarter and scaled to tenor and the riskiness of the buyer and country — not as an annual interest rate. Document handling and amendment charges apply on top.

What is bill discounting and how is it priced?

Bill (or invoice) discounting advances cash against an accepted invoice before its due date; the bank deducts a discount computed at a rate over MCLR for the credit period, and you receive the balance. It converts receivables into immediate working capital.

Letter of credit vs bank guarantee — what's the difference?

An LC is a payment instrument — the bank pays the seller on presentation of compliant documents. A bank guarantee is a default backstop — it pays only if the applicant fails to meet an obligation. LCs move trade; BGs secure performance.

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Trade finance in India: LCs, bill discounting & guarantees

How letters of credit, bill discounting and bank guarantees are priced in India — the instruments that move goods before the cash arrives, and what each actually costs.

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Trade finance bridges the trust gap between a buyer and a seller who may not know each other, and the timing gap between shipping goods and getting paid. Instead of one loan, it is a toolkit — letters of credit, guarantees and discounting — each pricing a specific risk.

Unlike a term loan, most trade-finance cost is quoted as a commission or fee (on the LC/BG value) plus, where the bank advances cash, a discounting rate over MCLR. There is no single 'trade finance rate' — it depends on the instrument, tenor and counterparty.

The instruments

Letter of Credit (LC): The bank guarantees payment to the seller once shipping documents are presented — the workhorse of cross-border and large domestic trade.
Bank Guarantee (BG): A standby promise to pay if the applicant defaults on a contractual obligation (performance, advance, bid).
Bill / Invoice Discounting: Convert an accepted invoice into cash today at a discount, instead of waiting for the credit period.
Packing Credit: Pre-shipment working capital for exporters to buy inputs and fulfil a confirmed order, at concessional export rates.

How trade finance is priced

Letters of credit (LC) and bank guarantees (BG): a commission charged on the instrument value, typically per quarter, scaled to tenor and risk.
Bill / invoice discounting: the bank advances cash against an accepted invoice at a discount rate over MCLR; you receive face value minus the discount.
Pre-shipment (packing credit) and post-shipment export finance carry concessional rates under RBI's export-credit framework.
Counterparty and country risk widen the commission — an LC on an unknown overseas buyer costs more than a domestic one.

Work the numbers for your own business.

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Questions, answered

What is trade finance?: Trade finance is the set of instruments — letters of credit, bank guarantees, bill/invoice discounting and export credit — that let buyers and sellers transact across the gap between shipping goods and receiving payment, with a bank pricing the counterparty and timing risk.
How much does a letter of credit cost in India?: An LC is priced as a commission on its value, usually charged per quarter and scaled to tenor and the riskiness of the buyer and country — not as an annual interest rate. Document handling and amendment charges apply on top.
What is bill discounting and how is it priced?: Bill (or invoice) discounting advances cash against an accepted invoice before its due date; the bank deducts a discount computed at a rate over MCLR for the credit period, and you receive the balance. It converts receivables into immediate working capital.
Letter of credit vs bank guarantee — what's the difference?: An LC is a payment instrument — the bank pays the seller on presentation of compliant documents. A bank guarantee is a default backstop — it pays only if the applicant fails to meet an obligation. LCs move trade; BGs secure performance.

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