A letter of credit isn’t borrowed money — it’s a bank’s conditional guarantee, priced as a standby fee on the face amount rather than interest on funds advanced.
How it works
The fee is the face amount times the annual fee rate, prorated for the actual number of days the letter of credit is outstanding — a full year outstanding pays the full annual rate; a shorter period pays proportionally less.
What this does not include
Many letters of credit also carry a separate issuance or amendment fee on top of the standby fee — this calculator computes the ongoing standby fee only, not one-time transaction charges a bank may add.
How to use this calculator
- Enter the face amount and annual fee rate.
- Enter the number of days the letter of credit will be outstanding.
Frequently asked questions
When does the beneficiary actually collect on a letter of credit?
Only if the applicant fails to perform as agreed — most letters of credit are never drawn on at all, similar to how most insurance policies are never claimed.
Who typically uses letters of credit?
Common in international trade (assuring an exporter gets paid) and large construction contracts (assuring a project owner a contractor will perform), where the parties may not have an established trust relationship.
Is the fee refunded if the letter of credit is cancelled early?
Sometimes prorated for unused time, sometimes not — terms vary by issuing bank and should be confirmed in the specific agreement.
