Getting an LC application approved isn’t automatic, even for an established company. Understanding what a bank actually evaluates helps applicants prepare a stronger case and avoid delay.
Creditworthiness of the Applicant
The issuing bank assesses the buyer’s (applicant’s) creditworthiness and existing banking relationship, since the bank is extending its own payment guarantee on the buyer’s behalf under a letter of credit.
Collateral or Credit Facility
Depending on the applicant’s credit standing, the bank may require cash collateral or draw against an existing credit facility, similar in principle to the collateral considerations covered in our bank guarantees guide.
Transaction Legitimacy and Sanctions Screening
Banks conduct their own sanctions and compliance screening on both parties and the underlying transaction before issuing an LC, independent of any screening the buyer or seller has done themselves.
Clarity of the Underlying Transaction
Banks scrutinize whether the goods, quantities, and required documents are clearly and consistently specified, since ambiguity in the LC terms themselves increases the bank’s own risk of a later dispute over compliance.
Country and Counterparty Risk
The perceived risk of the seller’s country and bank affects terms, particularly whether a confirming bank is required — a factor directly relevant to sellers in markets carrying elevated country risk.
Preparing a Strong LC Application
We help clients understand and prepare for what banks actually evaluate before applying for a letter of credit. Explore our advisory services or book a discovery call.
This article is general information, not financial advice.
Frequently Asked Questions
Does a bank automatically approve any letter of credit application?
No. The issuing bank assesses the applicant’s creditworthiness and banking relationship, since it is extending its own payment guarantee on the buyer’s behalf.
Do banks conduct their own sanctions screening for LC transactions?
Yes, independent of any screening the buyer or seller has done themselves, banks conduct their own compliance screening on both parties and the underlying transaction.
Why does country risk affect LC terms?
The perceived risk of the seller’s country and bank affects terms, particularly whether a confirming bank is required to provide an additional payment guarantee.