Issuance, acceptance, advising, confirmation, examination: each on its own basis, and the rounding to whole quarters decides more than the rates do.
Letter of credit fees are a stack of separate charges, most of them a percentage of the credit amount for each quarter or part of a quarter the bank is at risk, plus flat fees per event. On an illustrative 4,200,000 confirmed credit valid 120 days with 90 days' usance, the applicant pays 32,820 and the beneficiary 46,300: 79,120 in all, 1.88 per cent of the credit, and 88.9 per cent of it is priced on time, not on paperwork.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An exporter ships 4,200,000 of goods under a documentary credit issued by the buyer's bank and confirmed by a bank in the exporter's country. The credit is valid for 120 days and pays 90 days after presentation, so the issuing bank also accepts a usance draft. The credit states that the issuing bank's charges are for the applicant and all other charges are for the beneficiary, the common split. The credit is amended once and its single presentation carries a discrepancy that the applicant waives, so each flat charge applies once. The tariff below is illustrative: every bank publishes its own and large clients negotiate theirs.
| Charge | Paid by | Rate or amount | Basis |
|---|---|---|---|
| Issuance commission | Applicant | 0.20% | per quarter or part, over validity, minimum 250 |
| Acceptance commission | Applicant | 1.50% | per annum, actual/360, over the usance |
| Amendment | Applicant | 150 | per amendment |
| SWIFT and courier | Applicant | 120 | flat |
| Advising | Beneficiary | 0.05% | flat, minimum 150 |
| Confirmation | Beneficiary | 0.30% | per quarter or part, over validity plus usance |
| Document examination | Beneficiary | 0.15% | flat, minimum 200 |
| Discrepancy fee | Beneficiary | 100 | per discrepant presentation |
The time-based charges come first, because they are most of the bill and the rounding rule drives them. "Per quarter or part" means the days are divided by 90 and rounded up. A validity of 120 days is two quarters. The confirming bank is at risk until it is paid at maturity, so its period is validity plus usance, 210 days, which is three quarters.
Issuance = 4,200,000 × 0.20% × 2 = 16,800
Acceptance = 4,200,000 × 1.50% × 90 / 360 = 15,750
Confirmation = 4,200,000 × 0.30% × 3 = 37,800
Advising = 4,200,000 × 0.05% = 2,100; examination = 4,200,000 × 0.15% = 6,300
Excel, for a per-quarter charge: =MAX(Amount*RateQ*ROUNDUP(Days/90,0),Minimum)
| Charge | Applicant | Beneficiary | % of credit |
|---|---|---|---|
| Issuance commission | 16,800 | 0.400% | |
| Acceptance commission | 15,750 | 0.375% | |
| Amendment and SWIFT | 270 | 0.006% | |
| Advising | 2,100 | 0.050% | |
| Confirmation | 37,800 | 0.900% | |
| Document examination | 6,300 | 0.150% | |
| Discrepancy fee | 100 | 0.002% | |
| Total | 32,820 | 46,300 | 1.884% |
The applicant pays 0.78 per cent of the credit and the beneficiary 1.10 per cent. Confirmation is 81.6 per cent of the beneficiary's bill and 47.8 per cent of the whole. Whether that charge is worth paying depends on the issuing bank's risk, which is worked in whether a letter of credit confirmation fee is worth paying. Note what is not in the stack: if the exporter wants its money at presentation rather than at maturity, the confirming bank discounts the accepted draft, and that is an interest cost on top, not a fee.
Who pays is a term of the credit, not a convention. Under UCP 600 article 37(c), if the credit puts charges on the beneficiary and they cannot be collected or deducted from the proceeds, the issuing bank remains liable for them, and it will look to the applicant. A pro forma that says nothing about charges invites the most expensive split.
Because the time-based charges round up to whole quarters, the fee is a staircase, not a slope. Hold everything else and move only the validity.
| Validity, days | Issuance quarters | Confirmation quarters | Applicant | Beneficiary | Total | % of credit |
|---|---|---|---|---|---|---|
| 60 | 1 | 2 | 24,420 | 33,700 | 58,120 | 1.38% |
| 90 | 1 | 2 | 24,420 | 33,700 | 58,120 | 1.38% |
| 91 | 2 | 3 | 32,820 | 46,300 | 79,120 | 1.88% |
| 120 | 2 | 3 | 32,820 | 46,300 | 79,120 | 1.88% |
| 180 | 2 | 3 | 32,820 | 46,300 | 79,120 | 1.88% |
| 181 | 3 | 4 | 41,220 | 58,900 | 100,120 | 2.38% |
Going from 90 to 91 days of validity costs 21,000, half a point of the credit, for one day. Going from 91 to 180 costs nothing. The practical rule: set the validity from the shipment schedule plus a margin, then check where it lands against the 90-day steps. A credit at 92 days is paying for 180; one at 180 is using all of what it pays for.
The documentary credit priced in every form it is sold in, with the book's own order, is in the free workbooks for this case.
The bank divides the days at risk by 90 and rounds up, so 91 days is charged as two quarters. On a 4,200,000 credit at 0.20 per cent per quarter, a 90-day validity costs 8,400 of issuance commission and a 91-day validity 16,800. With confirmation the step is larger: one extra day costs 21,000 across the two charges.
Whoever the credit says. The common split puts the issuing bank's charges on the applicant and all others on the beneficiary: in the worked case 32,820 and 46,300. Under UCP 600 article 37(c), if charges put on the beneficiary cannot be collected, the issuing bank remains liable, so the split should be negotiated in the sales contract.
Because the confirming bank is at risk until maturity, so its per-quarter commission runs over validity plus usance. A 120-day credit with 90 days usance is 210 days, three quarters: 37,800 at 0.30 per cent per quarter on 4,200,000, or 81.6 per cent of the beneficiary's fees. Priced over the validity alone it would be 25,200.
The documentary credit is priced in every form it is sold in, with its confirmation, in the Chapters 6 to 8 workbook of Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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