Letter of credit limit calculator
Work out the LC limit the projected LC-backed purchases need, and check the limit a borrower has asked for. Figures in ₹ lakh.
LC limit eligibility
Cycles = Days in a year ÷ (Lead time + Usance period). LC limit = Projected purchases under LC ÷ Cycles. The lead time is from opening the LC to receiving the documents; the usance is the credit period on the bill.
This calculator is for learning. Banks apply their own policies, margins and benchmarks, so treat the result as a guide, not a credit decision.
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How banks size an LC limit
A letter of credit is a non-fund-based limit: the bank promises to pay the seller if the documents match the LC's terms. At any time, the LCs a borrower has open add up to the amount of purchases in the pipeline, from the day an LC is opened until the bill under it is paid.
So the limit depends on two things: how much the borrower buys under LCs in a year and how long each LC stays outstanding.
How to use this calculator
- Enter last year's purchases, imports and imports under LC. These are for context: they show how much of the buying actually happens under LCs.
- Enter the projected purchases under LC for next year.
- Enter the LC cycle: the lead time from opening the LC to receiving the documents, plus the usance period (the credit period on the bill).
- Enter the limit requested to compare.
The formula
- Cycles in a year = Days in a year ÷ (Lead time + Usance period)
- LC limit = Projected purchases under LC ÷ Cycles
Worked example
Purchases under LC are projected at ₹600 lakh next year, with a 30-day lead time and 60-day usance (a 90-day cycle):
- Cycles: 360 ÷ 90 = 4
- LC limit eligibility: 600 ÷ 4 = ₹150 lakh
- If the borrower has asked for ₹200 lakh, the request is ₹50 lakh above the assessment. The bank would ask for evidence of higher LC purchases or a longer cycle.
Last year, all ₹800 lakh of imports were under LC. If next year's projection falls to ₹600 lakh, the bank will ask why.
To understand how an LC works step by step, read how a letter of credit works.
Frequently asked questions
Is an LC limit secured? Usually by the goods bought under it, a cash margin and the borrower's other security with the bank. Devolved LCs (where the bank pays and the borrower can't) are a serious warning sign.
Should LC and working capital limits be assessed together? Yes. Goods bought under LC still have to be paid for, usually from the cash credit limit, so banks check that the working capital assessment covers the creditors that LCs create.
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