LC Discounting: The Hidden Lifeline for Indian MSME Exporters — and How It Differs from Factoring

LC Discounting — or Discounting of a Letter of Credit — is one of the smartest financial tools every small exporter in India should understand.

If you run an MSME or a growing export business — maybe you send textiles from Surat, handicrafts from Jaipur, or tea from Siliguri — you already know this painful truth:

In export trade, selling is easy, but getting paid takes time.

If your buyer is paying through a Letter of Credit (L/C), the wait can be even longer. The L/C opening bank releases payment only after the credit period ends. By then, your next production cycle might already be stuck for lack of cash.

For small exporters and MSMEs, waiting that long can choke your cash flow and slow your business.

That’s exactly where LC Discounting comes in as a lifeline.

It lets you get paid immediately after shipment — without waiting for the buyer’s bank to release the funds. Your own bank pays you now (after deducting a small interest) and later collects the full amount from the buyer’s bank when it’s due.

In other words, you stop waiting and start growing.

For India’s MSMEs, LC Discounting isn’t just a finance tool — it’s a growth strategy. It keeps your business running, your workers engaged, and your orders on track.

Let’s understand how it works in practice — and how it differs from another popular export financing method called Factoring.

What is LC Discounting?

LC Discounting is a trade finance facility offered by banks that allows exporters to get early payment against a confirmed Letter of Credit (L/C) issued by the buyer’s bank.

In simple words:

You’ve shipped the goods, and the buyer’s bank has already promised to pay you later under the L/C.
Your bank gives you the payment today (after deducting a small interest), and collects it later from the buyer’s bank.

For MSMEs, it’s like turning future export income into today’s working capital — safely and instantly.

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How LC Discounting Works for MSMEs

1. You ship your goods and submit shipping documents to your bank.
2. The bank verifies the documents as per the terms of the Letter of Credit.
3. You request your bank to discount the L/C.
4. Your bank pays you immediately after deducting a small interest fee.
5. The buyer’s bank releases the full payment later to your bank when due.

Result: you get liquidity now, instead of waiting 60–90 days.

You may also like to read: Irrevocable Letter of Credit (LC): The Safest Payment Method in Export Business

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Why LC Discounting Matters for MSMEs and Small Exporters

1. Improves Cash Flow

Small exporters often struggle with cash gaps between shipment and payment. LC Discounting bridges that gap, ensuring operations never stop due to lack of funds.

2. Reduces Dependence on Costly Loans

Instead of taking working capital loans or pledging assets, MSMEs can unlock funds from their own export orders. It’s faster, cleaner, and doesn’t require heavy paperwork.

3. Builds Trust with Overseas Buyers

When you deal under a Letter of Credit, the buyer feels secure too. It assures them that you’ll ship as per the agreed terms, and your payment is guaranteed by banks.

4. Helps You Scale Your Export Business

With smoother cash flow, you can take on bigger or multiple export orders confidently — without worrying about waiting for payments.

5. Minimizes Risk

Since the transaction is bank-backed, there’s almost no risk of non-payment or fraud. For MSMEs, that safety is priceless.

You may also like to read: Why a Letter of Credit (L/C) is the Backbone of Safe Export-Import Trade — And how I learned to reject bad letter of credit from a suspecious fraudster.

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The Real-Life Scenario: How a Small Exporter Benefited

Take the example of an MSME from Moradabad exporting brass home décor items to Europe.

The buyer opened a 90-day Letter of Credit. After shipping, the exporter’s capital was blocked in raw materials and freight costs.

By requesting L/C Discounting, his bank released 98% of the payment within 48 hours.

He used that money to start his next order immediately. Ninety days later, when the buyer’s bank released payment, the cycle repeated.

That’s how smart exporters turn paper promises into profit flow.

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LC Discounting vs Factoring — The Key Difference

Both LC Discounting and Factoring help exporters get early payment — but they are not the same.

Feature	LC Discounting	Factoring
Based On	Confirmed Letter of Credit (L/C)	Export invoice (no L/C)
Who Pays You	Your Bank	A factoring company or NBFC
Security	Backed by Buyer’s Bank	Backed by Buyer’s Creditworthiness
Risk Level	Very Low	Moderate
Ideal For	MSMEs using L/C for export	Exporters trading on open account
Cost	Lower	Slightly higher
Common Users	New exporters, MSMEs, high-value shipments	Experienced exporters, trusted buyers

In Simple Terms:

• LC Discounting is based on a bank’s promise — safe, verified, and secure.
• Factoring is based on a buyer’s promise — faster, but depends on buyer reliability.

For small exporters and MSMEs, LC Discounting is the safer way to build confidence in the global market, especially in the early stages of business.

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Advantages of Choosing LC Discounting Over Other Financing Options

• Quick access to funds after shipment
• Low-cost financing since risk is minimal
• No collateral or asset pledge required
• Boosts credit reputation with your bank
• Keeps your export cycle running smoothly

When you’re competing globally, financial agility can make or break your next order — and LC Discounting gives you that edge.

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FAQ on LC Discounting

Q1. What is LC Discounting in export business?
It’s a facility where banks pay exporters immediately after shipment against a confirmed Letter of Credit, deducting a small fee, and collect from the buyer’s bank later.

Q2. Is LC Discounting safe for MSMEs?
Yes. It’s considered one of the safest methods because it’s backed by the buyer’s bank, reducing the risk of default.

Q3. What’s the difference between LC Discounting and Factoring?
LC Discounting is based on a Letter of Credit from a bank, while Factoring is based on invoices and buyer credit. LC is safer; factoring is more flexible.

Q4. Can small exporters apply for LC Discounting?
Absolutely. Many Indian banks offer LC Discounting facilities specifically for MSMEs and first-time exporters.

Q5. Do banks charge high fees for LC Discounting?
No. Charges are typically lower than business loans, depending on the duration and risk involved.

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Key Takeaway

For India’s small exporters and MSMEs, cash flow is the heartbeat of the business.
While big corporations can afford to wait for payments, smaller players cannot.

That’s why understanding tools like LC Discounting isn’t just smart — it’s essential.
It’s not just about finance. It’s about freedom — the freedom to grow, to export more, and to compete globally without waiting for payments.

As one seasoned exporter said:

“The Letter of Credit gives you safety. LC Discounting gives you speed. Together, they keep your export business alive.”

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