Non-Fund Based Limit
UCP 600 / URDG 758 Governed
Let Your Bank's Credibility Close the Deal
Independent LC & BG advisory from Inwealfoney. We help you get the right non-fund-based limit — Letter of Credit for trade payments, Bank Guarantee for contractual commitments — at the lowest commission and margin your profile can command.
Commission from
0.5%–3% p.a.*
Margin from
10%–100%
What are LC & BG
Your bank's promise, standing in for your own
Letters of Credit and Bank Guarantees are non-fund-based facilities — the bank doesn't hand you cash, it lends its creditworthiness. No money moves unless something goes wrong (BG) or specific documents are presented (LC). That makes them dramatically cheaper than a term loan for the same limit, sanctioned within your overall Non-Fund-Based (NFB) limit alongside your fund-based facilities.
Letter of Credit (LC)
A payment mechanism · Governed by UCP 600
An irrevocable undertaking by the issuing bank to pay the seller once compliant documents (invoice, bill of lading, inspection certificate, etc.) are presented — regardless of whether the buyer is able to pay at that moment.
- Used to buy goods/services, domestic or import
- Bank pays the seller directly against documents
- Removes counterparty payment risk for the seller
- Common in manufacturing, trading, import-heavy businesses
Bank Guarantee (BG)
A performance backstop · Governed by URDG 758 / Indian Contract Act
A conditional promise by the bank to pay the beneficiary only if the applicant fails to meet a contractual obligation — bidding, performing, or repaying an advance. No payment happens unless the guarantee is invoked.
- Used for tenders, contracts, and project commitments
- Bank pays only on default/invocation, not routinely
- Signals credibility to clients, tender authorities, landlords
- Common in construction, government contracts, services
Cheaper than a loan
You pay a commission on the limit, not interest on drawn funds — a fraction of term-loan pricing for the same exposure.
Wins bigger contracts
Suppliers ship without payment risk; tender authorities accept your bid without cash security tied up.
Preserves working capital
Only a margin (often 10–25%, sometimes nil against strong limits) is blocked — not the full contract value.
Sits within one NFB limit
LC and BG typically share a combined non-fund-based limit alongside your OD/CC, sized against your overall banking relationship.
Types & Uses
Not every LC or BG is the same instrument
The right variant depends on what you're securing — a purchase, a tender, an advance, or a performance obligation.
01
Sight LC
Payment is made to the seller immediately on presentation of compliant documents — fastest and most common for straightforward trade.
02
Usance (Deferred Payment) LC
Payment is made after an agreed credit period (e.g. 90/180 days) from document acceptance, effectively financing the buyer's purchase.
03
Revocable vs Irrevocable
Irrevocable LCs (the market standard) cannot be amended or cancelled without consent of all parties, giving the seller firm assurance.
04
Confirmed LC
A second (confirming) bank adds its own payment undertaking on top of the issuing bank's — used when the seller wants extra assurance on a lesser-known issuing bank.
05
Back-to-Back LC
A second LC issued against the security of an existing export LC, letting a trading intermediary pay its own supplier.
06
Standby LC (SBLC)
Functions more like a guarantee than a payment tool — the bank pays only if the applicant fails to perform, common in cross-border and US-linked contracts.
07
Transferable LC
Lets the original beneficiary transfer all or part of the credit to a second beneficiary — useful for intermediaries and agents.
08
Revolving LC
Automatically reinstates after each drawdown, up to a set limit — suited to recurring monthly or quarterly shipments with the same partner.
09
Inland vs Import LC
Inland LC covers domestic purchases (typically up to 180 days); Import LC covers cross-border purchases (typically up to 360 days).
01
Bid Bond / Earnest Money BG
Submitted with a tender to prove serious intent — the beneficiary invokes it if the bidder withdraws or refuses the contract on winning.
02
Performance BG
Guarantees the applicant will complete the contracted work to specification — invoked on non-performance or defective delivery.
03
Financial BG
Guarantees a financial obligation is met — e.g. deferred payment to a supplier or lease/rent commitments to a landlord.
04
Advance Payment BG
Protects a buyer who has paid an advance — refunds the advance if the seller fails to deliver as agreed.
05
Deferred Payment BG
Secures a seller who has extended credit terms to a buyer, guaranteeing payment if the buyer defaults at maturity.
06
Retention Money BG
Lets a contractor receive the retention amount upfront instead of waiting till project completion, against a bank guarantee.
Eligibility
Do you qualify? Here's what banks actually check
Requirements shift with how much margin (cash/FD) you're willing to lock in versus how much the bank underwrites purely on your credit standing.
- ✓Cash margin or FD: 50%–100%New businesses or first-time applicants are typically asked for high margin against the guaranteed/LC amount.
- ✓Business vintage: no strict minimumFully cash/FD-backed LCs and BGs can be issued even to relatively new entities since the bank's risk is minimal.
- ✓KYC & constitution documents in orderCompany/firm registration, PAN, GST, and authorised signatory documentation.
- ✓Underlying contract or purchase orderA genuine trade transaction or tender document the LC/BG is being issued against.
- ✓Minimum guarantee/LC value: often ₹50,000+Most banks set a practical floor, though corporate relationships can negotiate smaller tickets.
- ✓Business vintage: 2–3 years+An established track record lets the bank underwrite a non-fund-based limit on credit standing alone.
- ✓Margin: as low as 10–25%, sometimes nilReduced margin against strong financials, collateral already held by the bank, or a large existing relationship.
- ✓Satisfactory CIBIL/CMR and account conductClean repayment history across existing fund and non-fund facilities.
- ✓Audited financials & positive net worthLast 2–3 years' financials showing stable turnover and debt-servicing capacity.
- ✓Existing collateral/relationship with the bankAn OD/CC or term loan relationship often allows LC/BG to be sanctioned as a sub-limit.
LC/BG at a Glance
Commission0.5% – 3% p.a.*
Margin (cash/FD)Nil – 100%
ValidityInland: up to 180 days
Import: up to 360 days
Import: up to 360 days
Processing fee0.1% – 0.5% of value
Confirmation (if any)0.5% – 2% p.a. extra
*Commission is typically charged per quarter (or part thereof) on the outstanding LC/BG value, not per annum on the full tenure — so a 6-month facility can attract commission for 2 quarters even if unused.
Note: Cross-border guarantees involving an Indian resident are governed by the FEMA (Guarantees) Regulations, with mandatory periodic reporting to RBI — we handle this compliance layer for you when structuring international LC/BG limits.
Documentation
What you'll need to keep ready
Documentation splits into what secures the limit itself and what backs each individual LC/BG issued under it.
KYC & Business Documents
- PAN & Aadhaar of all promoters/partners
- Business PAN, GST certificate, IEC (if trade-linked)
- MOA & AOA / partnership deed / LLP agreement
- Board resolution authorising the facility & signatories
Financial Documents
- Last 2–3 years' ITR with computation
- CA-certified/audited P&L and balance sheet
- Last 12 months' current account statement(s)
- Existing credit facility sanction letters, if any
Underlying Transaction Proof
- Purchase order / sales contract (for LC)
- Tender document / work order / contract (for BG)
- Proforma invoice from supplier (import LC)
- Draft LC/BG format as required by the beneficiary
Margin & Security
- FD receipt or cash margin instruction, if applicable
- Collateral documents for limit-based sanction (property/stock)
- Counter-guarantee or indemnity bond signed by applicant
Existing Credit Facilities
- Latest CIBIL/CIR of company and promoters
- Sanction letters of any running loans/OD/CC
- NOC from existing lender, if consolidating limits
Cross-Border / FEMA Documents
- Details of overseas beneficiary/counterparty
- FEMA (Guarantees) Regulations compliance declaration
- Form GRN reporting details, where applicable
Note: Exact requirements vary by bank, instrument type, and whether the transaction is domestic or cross-border. Share your profile with us and we'll send a checklist customised to the LC/BG structure we're targeting for you.
Charges Estimator
Estimate what your LC or BG will actually cost
Cost has two parts: a commission on the facility value, and margin money that gets locked up (often earning FD interest rather than sitting idle). Drag the sliders to estimate.
₹25,00,000
6 months
1.50%
25%
6.50%
₹0
Est. Net Cost Over Tenure
Commission Paid
Margin Locked
Total Commission
₹0
Margin Money Blocked
₹0
Est. FD Interest Earned
₹0
Net Effective Cost
₹0
*Indicative estimate only. Commission is usually charged per quarter (or part thereof) on the outstanding facility, not pro-rated daily — actual billing, processing fees, and FD interest depend on lender policy. This is not a quote.
How Issuance & Settlement Actually Work
01
Limit sanctioned
Bank sanctions an overall non-fund-based limit (or a standalone LC/BG) based on your eligibility, margin offered, and underlying transaction.
02
Instrument issued
The specific LC or BG is issued to the beneficiary for the agreed value, validity, and conditions — margin is blocked and commission charged upfront for the period.
03
Normal course: no cash outflow
For BG, nothing is paid unless invoked. For LC, the bank pays the seller against compliant documents and then recovers the amount from you as per agreed terms (often via your OD/CC).
04
Closure or renewal
On expiry, the instrument lapses and margin is released (BG), or is renewed/extended for ongoing contracts — with fresh commission for the extended period.
FAQs
Common LC & BG questions
An LC is a primary payment mechanism — the bank pays the seller as soon as compliant documents are presented, as part of a normal transaction. A BG is a backstop — the bank pays the beneficiary only if the applicant defaults on the underlying obligation. LC pays for a transaction; BG protects against non-performance.
Even though no funds are disbursed upfront, the bank is taking on contingent liability — it must pay if the LC is drawn or the BG is invoked. Margin (cash or FD) is the bank's cushion against that risk, and it typically reduces as your credit relationship and track record strengthen.
Most banks charge commission per quarter (or part thereof) on the outstanding facility value, not strictly pro-rated by day. A guarantee running for 4 months and 5 days can be billed for 2 full quarters — always check the bank's specific slab before committing to a tenure.
Yes — a seller holding an accepted usance LC can typically get it discounted with a bank to receive funds before the deferred payment date, at a discounting rate linked to the issuing bank's credit standing and the LC tenor.
The beneficiary submits an invocation claim to the issuing bank as per the BG's terms. The bank is obligated to pay on a valid, compliant claim — after which it recovers the amount from the applicant, first from the margin held and then from other agreed security or a demand for repayment.
An SBLC functions more like a bank guarantee than a payment tool — the bank pays only if the applicant fails to perform, rather than as the routine settlement mechanism a commercial LC is. It's commonly used in cross-border and US-linked contracts where a BG structure isn't standard practice.
Yes. Guarantees or LCs involving a non-resident party fall under FEMA regulations, and an Indian resident can generally issue a cross-border guarantee only where the underlying transaction is permitted under FEMA — with periodic reporting obligations to RBI through the AD bank.
Let's structure the right LC or BG for your business
Share your contract or trade requirement and we'll compare banks on commission, margin, and turnaround — no cost, no obligation.
Inwealfoney · Loan advisory services. LC/BG commission, margin and eligibility are indicative, subject to RBI/FEMA regulations and lender policy at the time of application. This is not legal advice.