Introduction

A Revolving Letter of Credit (LC) is a specialized trade finance instrument designed to facilitate continuous transactions under a single LC framework.
By allowing multiple draws against the same credit limit, it supports ongoing trade cycles for exporters and importers engaged in long-term supply agreements.

Keywords: successive shipments, multiple draws, credit renewal, ongoing trade cycle, renewable LC, periodic payments
Related terms: renewable LC, cumulative credit, non-cumulative credit, multi-shipment LC, UCP600 compliance

I. Overview of Revolving LC Mechanism

A revolving LC operates by enabling a single credit facility to be reused or renewed automatically after each draw, reducing the need for repeated LC issuance.
It is ideal for long-term contracts involving successive shipments or periodic deliveries, as it streamlines financial operations and maintains continuity of trade.

Key components include:

• Credit Limit: Maximum amount authorized for drawdowns.

• Draw Period: Scheduled intervals for accessing the credit.

• Renewal Mechanism: Automatic replenishment of the credit limit after each draw.

• Compliance Framework: Governed by UCP600 or agreed international trade rules.

II. Operational Workflow

The typical operation of a revolving LC follows a structured sequence:

1. LC Issuance: Buyer’s bank issues a revolving LC in favor of the exporter.

2. First Shipment & Draw: Exporter presents compliant shipping documents; bank honors the first draw against the LC.

3. Credit Renewal: Upon utilization, the LC limit is reset either automatically or according to agreed intervals.

4. Subsequent Shipments: Exporter ships goods for the next period; the process repeats under the same LC.

5. Final Shipment & Closure: After all deliveries are completed, the LC is either closed or allowed to expire.

This mechanism ensures continuous trade financing without reopening new credit facilities for each shipment.

III. Types of Revolving Mechanisms

1. Time-Based Renewal

• Credit limit is refreshed at regular intervals (e.g., monthly, quarterly).

• Suitable for predictable, recurring shipments.

• Unused credit may expire (non-cumulative) or carry forward (cumulative) depending on agreement.

2. Value-Based Renewal

• Credit limit is replenished after each draw up to the maximum authorized value.

• Ideal for irregular shipment schedules where draw amounts vary.

• Offers flexibility and liquidity optimization for exporters and buyers.

IV. Strategic Benefits

1. Operational Efficiency: Reduces administrative burden by avoiding multiple LC issuances.

2. Predictable Cash Flow: Supports regular payments aligned with shipment schedules.

3. Liquidity Management: Enables exporters to access funds continuously without waiting for new LCs.

4. Trade Continuity: Guarantees ongoing supply, enhancing buyer-supplier relationships.

5. Risk Mitigation: Ensures payment security under UCP600 or ISP98 rules.

V. Key Considerations

• Accurate Documentation: Each draw requires submission of compliant shipping and trade documents.

• Credit Monitoring: Banks and beneficiaries must track remaining credit availability.

• Cumulative vs Non-Cumulative: Defines whether unused credit carries forward or expires at period-end.

• Expiration Dates: Revolving LC must clearly define draw period and total validity to avoid disputes.

• Bank Fees & Charges: Often depend on number of draws, credit limit, and transaction complexity.

VI. Example Scenario

Contract: Monthly supply of raw materials for 12 months.

• Credit Limit: USD 100,000 per month

• Draw Mechanism: Time-based revolving LC

• First Month: USD 90,000 drawn; limit resets to USD 100,000 for next month

• Subsequent Months: Draws adjusted according to shipment value; unused amounts may or may not carry forward

This allows both buyer and exporter to maintain uninterrupted trade flow without reopening new LCs monthly.

VII. Conclusion

A revolving LC simplifies long-term trade financing by enabling multiple draws against a single credit limit.

• Time-based LCs: Best for predictable periodic shipments.

• Value-based LCs: Ideal for flexible, irregular trade volumes.

By leveraging revolving LCs, companies optimize liquidity, ensure timely payments, and enhance operational efficiency, making them a critical tool in global trade finance.

FAQ — How Does a Revolving LC Work?

Q1 — What is a renewable LC?
A renewable LC allows the same credit limit to be reused automatically for multiple draws during the contract term.

Q2 — How does a revolving LC support multiple shipments?
Each shipment is financed against the credit available under the LC, and the limit is replenished per the agreed mechanism.

Q3 — Can unused credit be carried forward?
Yes, if the LC is cumulative; otherwise, unused funds expire at the end of the period.

Q4 — Who benefits from a revolving LC?
Exporters with recurring shipments and buyers seeking simplified trade financing benefit most.

Q5 — What governs the legal framework?
Revolving LCs operate under UCP600, ICC rules, or mutually agreed trade regulations.