State of the Letters of Credit (LC) market in 2026

Letters of Credit (LC) are an integral part of the trade finance sector.

In many ways, LCs have been around for as long as there has been international trade.

In the modern sense, as a trade finance product, they’re a maturing market and maybe not as high-growth as others, like SCF, IF, or working capital.

However, LCs are still a viable way of funding a trade finance transaction. Making them a profitable and viable form of credit that banks, trade finance providers, neo-banks, and fintech SaaS can offer to SMEs and larger organizations.

How do Letters of Credit work?

“A letter of credit brings a level of trust and comfort into the relationship between a buyer and seller,” said Demet Kologlu, Head of Core Trade Products Sales at J.P. Morgan.

A letter of credit (sometimes called a commercial letter of credit) is a promise from a bank to pay a supplier on behalf of a buyer. This payment is made once the supplier meets a set of agreed-upon conditions.

It solves an ancient problem, one that literally goes back thousands of years: a supplier doesn’t want to ship products before getting paid.

At the same time, a buyer doesn’t want to pay before receiving the goods.

A letter of credit (LC) lets both sides move forward with confidence. This is a classic international trade solution, where it de-risks the transaction because it can be difficult to assess a new trading partner’s reliability or financial health.

Here’s a short summary of how LCs work:

Either the buyer (the “applicant”) or the supplier (the “beneficiary”) can request that payment be handled through a letter of credit.
Once the two parties sign a contract and agree to this arrangement, the buyer applies to their own bank
The “issuing bank” is then asked to have the letter of credit established.
From there, the buyer, the supplier, and their respective banks work out the details together.
The terms usually include outlining exactly what the supplier needs to provide before payment is released, like documents confirming the goods were shipped correctly.
Payment can be triggered either as soon as the supplier submits documents that match the letter of credit’s terms, or on a pre-agreed future date.
Either way, the supplier isn’t relying on the buyer directly to pay. The issuing bank pays the supplier’s bank, which then pays the supplier
Both sides in the transaction normally cover their own bank’s fees. What the buyer pays for the letter of credit depends on the deal itself:
- The buyer’s creditworthiness
- Size of the transaction
- The agreed payment terms all factor in.

What is a confirmed letter of credit, and why are they needed?

A “confirmed” letter of credit adds a second layer of payment security for the supplier. In most cases, requesting payment via letter of credit shifts non-payment risk from the buyer onto the issuing bank.

But if the supplier is also uneasy about the issuing bank itself (or about the stability of the country it’s based in), the supplier can ask its own bank to “confirm” the letter of credit.

Providing a much-needed double layer of reassurance.

With this extra step, the confirming bank guarantees payment to the supplier as soon as the required documents are submitted correctly. It functions like an insurance policy, shifting risk onto the confirming bank rather than the issuing one.

Confirmation fees vary depending on the issuing bank’s creditworthiness and the credit rate. Larger banks in more developed economies come with lower confirmation costs.

💡Download our exclusive eBook: State of Trade Finance 2026 (Looking Ahead to 2027)

How to use letters of credit effectively?

For CFOs, small and medium businesses, and any enterprise organizations that are using LCs, here are a few things worth keeping in mind:

Start early. LCs take time to arrange. Negotiation between all parties, plus due diligence on both the buyer’s credit and the supplier’s documentation requirements. Because the issuing bank will only pay if the paperwork matches the letter’s terms exactly, getting the wording right matters enormously. Rushing this and making any mistakes increases the risk of contradictions or errors that make compliance impossible.
Weigh the cost and complexity. LCs tend to be more expensive (as a financial instrument) and more involved than other payment methods, so they’re most often used with new or higher-risk counterparties. As trust builds over time, businesses may shift to simpler payment methods like SCF, IF, or working capital.

Does LiquidX support Letters of Credit?

As we outlined in this article, when we launched in 2016, LiquidX was trying to be everything for everyone: transaction management, corporate treasury, insurance, and business operating technology for banks and FinTech SaaS partners.

Since then, we’ve processed over $120 billion in trade finance transactions across multiple product streams and sectors. Of that, $90 billion was in the last 5 years (2020-25; not counting what we’ve processed in 2026).

Now, we are iterating and evolving into a new era.

Consolidating on our core strengths and moving forward with an exciting product roadmap to further enhance our market position.

At present, this means we don’t facilitate and support LC documents and transactions. However, this is a market we’ve considered and could move into as our product continues to iterate and evolve.

LiquidX offers the only complete end-to-end digital solution for trade finance and working capital, making it easier for global and regional banks and asset managers (financial institutions) to scale globally.

LiquidX enables FIs to deploy a single, modular digital platform that digitizes trade and working capital flows from inception to distribution, and everything in between.

Our three main markets are:

Regional Banks Rely on LiquidX for Trade Finance Software

How Asset Managers Are Using LiquidX to Scale Trade Finance Operations & Profits

Why Global Banks Rely on LiquidX for Trade Finance Software

Some research puts the LC market at $4 billion, with a CAGR of 5.8%, estimating that it will reach $5.89bn in 2030.

In our experience, working with 100+ banks and financial institutions, we know the market is a lot larger, and with the shake-up in international trade, we expect this market to grow more steadily than many estimate right now.