Letter of credit, SBLC, escrow and TT: paying for commodities

In commodity trade the payment instrument decides who carries which risk. Here is how documentary credits, standby letters of credit, collections, escrow and bank transfers work, and where each one fits.

Last updated: October 20265 min readAndalucia Premium

In brief

A documentary letter of credit pays against compliant documents and is governed by the ICC’s UCP 600.

A standby letter of credit is security: it only pays if a party fails to perform; ISP98 or UCP 600 apply.

Unsecured advance payments to unknown parties are the most common source of losses in commodity trade.

How does a letter of credit work?

The buyer’s bank undertakes to pay the seller when the seller presents documents that comply with the terms of the credit. The seller relies on the bank, and the buyer pays only against proof of shipment.

Buyer and seller agree on payment by letter of credit in the contract.
The buyer asks its bank (issuing bank) to open the credit in favour of the seller.
A bank in the seller’s country advises the credit and may add its confirmation.
The seller ships the goods and presents the required documents.
The banks check the documents; if they comply, payment is made.
The buyer receives the documents and takes delivery of the cargo.

Documentary credits are usually subject to the ICC’s UCP 600 rules. Under UCP 600 credits are irrevocable.

What is a confirmed letter of credit?

A confirmed letter of credit carries an additional payment undertaking from a second bank, usually in the seller’s country. The seller is then protected even if the issuing bank or its country cannot pay.

Confirmation is useful when the seller does not know the issuing bank or sees country risk, for example because of transfer restrictions. It costs a confirmation fee, and who pays it is a point for negotiation in the contract.

What is an SBLC?

A standby letter of credit (SBLC) is a bank’s undertaking to pay if its client fails to meet an obligation, such as payment or delivery. It works as security, not as the normal means of payment.

In a regular trading relationship, goods may be paid by bank transfer while an SBLC secures the seller in case the buyer does not pay. SBLCs are usually issued subject to ISP98 or, less often, UCP 600. Demand guarantees, which work in a similar way, are typically governed by URDG 758.

Caution: offers that present an SBLC as a tradable investment or as something to be “leased” or “monetised” have nothing to do with genuine trade finance.

SBLC vs LC: what is the difference?

A documentary letter of credit is expected to be used: it pays when the shipment documents are presented. An SBLC is expected not to be used: it pays only if a party defaults.

	Documentary LC	Standby LC (SBLC)
Purpose	Payment for the goods	Security against non-performance
Triggered by	Compliant shipping documents	Statement of default by the beneficiary
Usual rules	UCP 600	ISP98 or UCP 600
Normal outcome	Drawn on every shipment	Not drawn if all goes well

What is a documentary collection?

In a documentary collection, banks pass the shipping documents to the buyer only against payment (documents against payment, D/P) or against acceptance of a bill of exchange (documents against acceptance, D/A). The banks do not guarantee payment themselves.

Collections are usually governed by the ICC’s URC 522. They are cheaper and simpler than a letter of credit, but the seller bears the risk that the buyer does not take up the documents. They therefore suit established relationships rather than first deals.

When is escrow used in commodity trading?

Escrow means that a neutral third party, such as a bank or an independent escrow agent, holds the funds until agreed conditions are met. It is used in some transactions where a bank instrument is not practical.

A genuine escrow arrangement has a written agreement, a regulated and verifiable escrow agent and clearly defined release conditions, for example presentation of inspection certificates. Be careful with “escrow accounts” controlled by the counterparty itself or by an unknown intermediary: they offer no protection.

Is payment by bank transfer (TT) safe for commodities?

Bank transfer is safe when the parties trust each other and payment is tied to documents or delivery. Unsecured advance payments to unknown parties are among the most frequent causes of loss.

Common structures are a partial payment after contract and the balance against copies or originals of the shipping documents, or full payment against documents after inspection. Between new partners, a bank instrument or a security such as an SBLC is usually advisable.

Which payment instrument fits which situation?

As a rule: the less the parties know each other, the more bank security is needed. Established relationships can move to simpler and cheaper instruments.

Situation	Typical instrument
First deal, unknown counterparty	Confirmed irrevocable documentary LC
Repeated deliveries, some trust	TT against documents, secured by an SBLC
Long-standing relationship	Documentary collection or open account
Bank instrument not practical	Escrow with a regulated agent

This overview is general information, not financial advice. Your bank can tell you which instruments it offers and at what cost.

Last updated: October 2026This page provides general information about trade practice. It is not legal, tax or investment advice.

FAQ

Frequently asked questions

Commodity trading questions, answered

What does MT700 mean?

MT700 is the SWIFT message type banks use to issue a documentary letter of credit. Guarantees and standby letters of credit are commonly issued with MT760.

Can a letter of credit be cancelled?

Under UCP 600 a letter of credit is irrevocable, so it cannot be amended or cancelled without the agreement of the issuing bank, any confirming bank and the beneficiary.

What is a discrepancy in a letter of credit?

A discrepancy is a deviation between the presented documents and the terms of the credit, such as a wrong date or quantity. The bank may then refuse payment unless the buyer waives the discrepancy.

What is a transferable letter of credit?

A transferable credit allows the first beneficiary, often an intermediary trader, to transfer all or part of it to the actual supplier. It must be expressly designated as transferable.

How long does it take to open a letter of credit?

It depends on the buyer’s credit lines and the bank, often from a few days to a few weeks. The time should be built into the contract schedule.

Do you provide financing for transactions?

No. We are a broker and do not provide credit or financing. The parties arrange payment instruments through their own banks.

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