Misconceptions in Trade Finance

5 mins read – Industry oriented case study

Common Misconceptions in Trade Finance — What Clients Get Wrong and Why It Matters

A candid guide from the desk of a trade finance practitioner

“In trade finance, the most expensive misunderstanding is not the one that costs money — it is the one that costs time, credibility, and opportunity.”

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Introduction:

Every week, we speak with importers, exporters, project developers, and intermediaries who arrive with genuine business needs but fundamentally incorrect assumptions about how trade finance instruments work. Some of these misconceptions are harmless and easy to correct in a single conversation. Others, however, have led clients to waste months chasing arrangements that do not exist, sign agreements with fraudsters, or worse, pay penalties for failing to deliver instruments that should never have been requested in the first place.

This post is not written to embarrass anyone. It is written because clarity protects people. The trade finance industry has enough complexity without misinformation layered on top of it. If any of the following scenarios sound familiar, read carefully.

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Misconception 1: “You will pay the seller on our behalf when you issue the Letter of Credit”

The short answer: We open the facility. We do not settle the invoice.

Clients requesting a Letter of Credit, whether at Sight or on Deferred/Usance terms, often assume that we will pay or settle the seller’s invoice on their behalf.

A Letter of Credit is a payment mechanism, not a payment itself. Our role is to issue the LC facility for a specific transaction so that the buyer can fulfil their payment obligation when it falls due, through their own bank, against compliant documents. We do not advance funds to the seller, nor do we absorb the invoice on the buyer’s behalf.

This misunderstanding is especially common with Sight LCs, which leads directly to the next misconception.

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Misconception 2: “The LC has a 90-day validity, so we have 90 days to pay”

The short answer: The validity period belongs to the seller, not the buyer.

Clients sometimes ask: “Can you issue us a Sight LC, settle the payment to the seller, and we will reimburse you after 30 days? The LC is valid for 90 days anyway.”

This reflects a fundamental misreading of how LC validity works. When a seller requests a 90-day Sight LC, they are indicating that they need up to 90 days to manufacture or source the goods and compile the full set of compliant shipping documents for presentation to their advising bank. The 90 days is the seller’s production and preparation window.

Once the documents have been presented to the bank, the buyer is required to pay immediately, either through the LC or outside of it, in order to obtain the release of the shipping documents. There is no deferred payment window hidden inside a Sight LC. Payment is triggered by document presentation, not by the expiry of the LC.

“A Sight LC is not a credit facility. It is a conditional payment commitment. The moment compliant documents are presented, payment is due.”

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Misconception 3: “Just issue us a Usance LC — it cannot be that difficult”

The short answer: Deferred payment LCs are among the most scrutinised instruments in banking. They are never issued freely.

Some clients approach Usance or Deferred Payment LCs as though they are a standard product available without conditions, a view often reinforced by brokers or intermediaries who have little understanding of what they are arranging.

The reality is that a Deferred Payment LC is one of the riskiest instruments in trade finance. Both banks and sellers treat it with considerable caution. While Usance LCs are common in trade flows involving Emerging Markets and Least Developed Countries, a buyer’s own bank will rarely issue one without adequate collateral, assets, or cash cover equivalent to the invoice value. When buyers are declined by their own banks, they sometimes approach specialist trade finance providers expecting a different outcome without additional conditions.

Our partner banks issue Usance LCs under two strict parameters only:

1. The Usance period is granted, but shipping documents will not be released until the full invoice value has been settled.
2. A Usance LC may be issued where 100% cash cover is provided upfront.

There is no version of a Deferred LC that transfers credit risk entirely to the issuing bank without security. If someone is telling a client otherwise, that is a conversation worth examining very carefully.

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Misconception 4: “An SBLC can be used to raise a loan or monetised for funding”

The short answer: SBLC monetisation does not exist in legitimate banking. It is a fraud.

This is the misconception that causes real financial harm, and it deserves to be addressed plainly.

Terms such as SBLC leasing, purchase of SBLC, SBLC monetisation, funds against SBLC, and fresh cut SBLC are not legitimate banking products. They do not appear in any standard banking framework, they are not offered by any regulated financial institution, and they have no basis in UCP 600, ISP98, or any other internationally recognised set of rules governing bank instruments. These terms exist in one context only: fraud.

The profile of these enquiries has become more sophisticated over time. Clients now often describe the SBLC as being required for a project they are participating in, a framing designed to sound legitimate. In reality, they have been drawn into a scheme by a fraudulent counterparty who has convinced them that a bank instrument can serve as collateral for a loan or be converted into cash. It cannot.

Not one of these clients had, at any point, asked their own bank, a trade finance department, or a branch manager whether such a product exists. A single conversation with any regulated banker would have ended the matter immediately.

“If a deal requires an SBLC before any goods, services, or verified project exist — stop. That is not trade finance. That is a trap.”

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Misconception 5: “The seller is asking for an RWA before the SBLC — that must be normal”

The short answer: No legitimate seller needs an RWA. If one is being requested, examine the counterparty immediately.

A Ready, Willing and Able (RWA) letter is a written declaration that a buyer intends to proceed with a transaction. It carries no legal enforceability, no financial weight, and no value to a genuine seller. A legitimate seller operating within standard trade finance practice will request an LC, SBLC, or bank guarantee, because these instruments carry real commercial and legal standing under international rules. An RWA letter gives them nothing.

Clients who are asked to provide both an RWA and an SBLC should treat this as an immediate red flag.

The RWA Fraud Scheme — How It Works:

A fraudster posing as a seller requests an RWA letter, followed by an SBLC within a tight deadline. Once the RWA is in hand, the clock starts. To create an appearance of legitimacy, the fraudster may even send a fake 2% performance guarantee to the buyer’s bank. If the buyer fails to deliver the SBLC within the stipulated timeframe, the fraudster claims a financial penalty for non-performance.

The objective is either to extract penalty payments from the buyer or to obtain the SBLC for fraudulent use elsewhere. Neither the RWA requirement nor the penalty clause reflects any recognised banking or trade finance standard.

“Legitimate counterparties do not build penalty structures around the delivery of bank instruments. That is not how trade finance works.”

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Misconception 6: “The seller is asking for a BCL or POF — we need to provide one”

The short answer: Bank Comfort Letters and Proof of Funds certificates are not standard trade finance requirements. Treat requests for them with caution.

In legitimate trade finance, a buyer’s financial capacity is demonstrated through the instrument itself — the LC, SBLC, or bank guarantee that their bank issues on their behalf. That instrument carries the issuing bank’s own credit standing behind it. There is no additional layer of documentation required to prove the buyer has funds.

Requests for a Bank Comfort Letter (BCL) or Proof of Funds (POF) as a precondition to a commercial transaction have no standard basis in trade finance practice. These requests typically appear in fraudulent schemes designed to gather sensitive banking information, extract processing fees, or stall negotiations while other schemes are being prepared in parallel.

If a counterparty is requesting a BCL or POF before they are willing to proceed, verify that counterparty independently before providing anything.

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A Final Word

Trade finance is a specialised field built on decades of international rules, banking practice, and legal precedent. It functions because the instruments within it carry genuine, enforceable weight. That weight is precisely what makes it a target for those who seek to replicate its language without its substance.

If a client, counterparty, or intermediary is using terminology that sounds like trade finance but the underlying request does not align with any standard banking practice — ask questions. Consult your bank directly. Speak to a practitioner. The time spent verifying is never wasted. The time spent chasing fraudulent schemes almost always is.