> ## Content Index > Fetch the complete content index at: https://www.financelygroup.com/llms.txt > Use this file to discover other available public pages before exploring further. # Why Letters of Credit Are Returning in 2026 - URL: https://www.financelygroup.com/why-letters-of-credit-are-returning-in-2026/ - Published: 2026-08-27T22:23:31.000Z - Updated: 2026-08-27T22:23:31.000Z - Description: LC demand is rising again in 2026 as geopolitical risk, AI infrastructure, new trade corridors and payment uncertainty reshape global trade finance. - Author: Financely Debt Advisors - Tags: trade finance, letters of credit Traditional letters of credit spent years losing ground to open-account trade. In 2026, demand is rising again. The change is being driven by geopolitical risk, new trading relationships, strategic supply chains, data-center infrastructure and a renewed willingness to pay for certainty. This is not a wholesale return to the trade-finance market of the 1990s. Established companies are not abandoning open-account settlement across trusted supply chains. Letters of credit, Standby Letters of Credit and guarantees are being inserted selectively where the commercial consequences of non-payment, non-performance or supply disruption have become too expensive to leave unsecured. +12% HSBC Global Trade Solutions revenue growth in the first half of 2026\. $120B HSBC trade loan balances at the end of June 2026\. +30% Approximate rise in HSBC documentary credit and short-term trade exposures. $3.5B Upsized syndicated LC facility supporting Switch's data-center development pipeline. ## The Long Decline Came First Any discussion of an LC resurgence needs to start with the structural decline that preceded it. In May 2026, the [Federal Reserve published an extensive review of US bank trade-finance activity](https://www.federalreserve.gov/econres/notes/feds-notes/trade-finance-activities-of-u-s-banks-what-the-data-can-tell-us-20260508.html). Its data show a clear downward trend in traditional bank trade finance over the previous decade. Outstanding commercial letters of credit reported by US banks had fallen to roughly $15 billion by the end of 2024\. Around 90% of US banks reported no commercial LC exposure at all. Trade-finance claims also declined materially as a percentage of US goods exports. The reasons are familiar. Long-established suppliers became comfortable shipping on open account. Multinational groups increasingly traded within their own supply chains. Compliance costs increased. Correspondent banking networks contracted. Large corporate buyers gained enough negotiating power to demand longer payment terms without providing a bank instrument. That structural change has not disappeared. For established counterparties with strong balance sheets, predictable jurisdictions and years of transaction history, open-account settlement remains efficient. The important 2026 shift is not from open account to LC everywhere. It is from unsecured commercial trust to structured payment assurance where the cost of failure has increased. ## Traditional Trade Finance Demand Started Moving Again In May, [Global Trade Review reported a noticeable increase in demand for traditional trade-finance instruments](https://www.gtreview.com/news/global/the-return-of-the-letter-of-credit/?ref=financelygroup.com)at HSBC and Citi. HSBC said demand had been rising for six to nine months across products including Standby Letters of Credit, bills of exchange and usance structures. Citi described greater use of LCs where companies face counterparty risk, jurisdictional uncertainty or complicated logistics. This is a different demand profile from a company simply looking for working capital. The underlying concern is increasingly execution risk. A manufacturer committing scarce production capacity wants stronger payment certainty. A commodity supplier entering a new market may not want to extend unsecured terms to an unknown buyer. A buyer dealing with a critical supplier may need to demonstrate bank-backed payment capacity before production begins. Financely's [documentary letter of credit advisory](https://www.financely.io/documentary-letter-of-credit-services-for-importers-and-exporters?ref=financelygroup.com)work reflects the same distinction. The financing question cannot be separated from the purchase contract, shipment route, issuing bank, document requirements, tenor and source of reimbursement. ## Bank Results Now Provide Harder Evidence The early reports were based largely on what trade bankers were seeing in their pipelines. First-half bank results now provide stronger evidence. According to [GTR's August review of bank trade-finance results](https://www.gtreview.com/news/global/trade-finance-results-banks-see-strong-loan-demand/?ref=financelygroup.com), HSBC generated $1.54 billion of Global Trade Solutions revenue during the first six months of 2026, up 12% year over year. Its trade loan balances increased by almost one-third to approximately $120 billion. Documentary credits and short-term trade-related transaction exposures rose by almost 30% to $8.5 billion. HSBC also attributed second-quarter trade fee growth partly to guarantees in Asia and the United States. The broader market is not moving uniformly. Standard Chartered reported a 2% decline in first-half trade and working-capital operating income while simultaneously increasing financial guarantees, trade credits and irrevocable LC exposure. The evidence therefore supports a narrower conclusion: particular forms of funded and unfunded trade exposure are growing quickly where clients face greater commercial or contractual risk. ## Open Account Still Dominates Trusted Trade The LC resurgence should not be confused with the disappearance of open-account trade. For a German manufacturer that has sold to the same French distributor for 15 years, introducing an LC into every shipment could add cost and administration without materially reducing risk. The calculation changes when the buyer is new, the transaction is unusually large, the jurisdiction presents additional risk, production must be reserved months in advance or the goods cannot easily be redirected following default. | Transaction Profile | Likely Structure | Commercial Reason | | -------------------------------------------------------- | ------------------------------ | ------------------------------------------------------------- | | Established buyer and supplier with long payment history | Open account | Low incremental benefit from bank intermediation | | New cross-border supplier relationship | Documentary LC or confirmed LC | Payment and country-risk mitigation | | Large strategic procurement contract | LC, SBLC or guarantee | Bank-backed payment or performance support | | Supplier wants sight payment while buyer needs tenor | Usance or UPAS LC | Separates supplier payment from buyer reimbursement | | Large contractual performance obligation | SBLC or bank guarantee | Supports payment or performance obligations following default | Companies therefore need to choose the instrument around the actual commercial exposure. Financely's [trade finance instruments hub](https://www.financely.io/trade-finance-instruments-and-services?ref=financelygroup.com)covers documentary credits, Standby Letters of Credit, guarantees, trade loans and related transaction structures. Structuring a Live LC-Backed Transaction? Financely advises importers, exporters, commodity traders and operating companies on documentary credits, Standby Letters of Credit, confirmation, discounting and structured trade-finance transactions. [View Trade Finance Services ](https://www.financely.io/trade-finance?ref=financelygroup.com) ## South-South Trade Creates a Natural LC Market One of the more important developments identified by trade-finance practitioners is the expansion of South-South trade. Trade flows between Asia, the Gulf, Africa and other emerging markets increasingly connect companies that may have significant commercial capacity but limited history with one another. That creates exactly the environment where documentary trade products have historically been useful. A supplier in Southeast Asia selling into a new African or Middle Eastern distribution channel may be unwilling to offer 60-day unsecured terms. The buyer may be equally unwilling to pay the full contract value before shipment. An LC allows the parties to replace part of that bilateral credit question with a documentary undertaking from an acceptable issuing bank. Confirmation can further alter the seller's risk where the issuing bank or country does not fit its internal credit policy. The transaction still has to work commercially. An LC does not establish ownership of goods, eliminate fraud or repair an unfinanceable trade. It creates a defined payment mechanism around documents and bank undertakings. ## AI Infrastructure Has Created a Completely Different LC Market The most striking example of new LC demand in 2026 has relatively little to do with conventional import and export settlement. US data-center developers need enormous quantities of electricity. Utilities and grid operators may have to reserve generation capacity, build substations, expand transmission infrastructure and commit resources years before a facility becomes fully operational. Those counterparties want credit support. In June, [GTR reported a surge in large LC facilities supporting data-center power procurement and grid interconnection obligations](https://www.gtreview.com/news/americas/demand-for-letters-of-credit-surges-as-data-centres-scramble-for-power/?ref=financelygroup.com). Of 109 US regulatory filings involving collateral requirements tracked by Halcyon, 67 mentioned a letter of credit. Another 12 referred specifically to a standby letter. Switch's $3.5 Billion LC Facility Data-center developer Switch initially closed a $2.6 billion syndicated performance LC facility in April 2026 before increasing it to $3.5 billion. Natixis CIB and BBVA led the structure, with BNP Paribas, Citi and Société Générale among participating lenders. The facility supports obligations to utilities and other counterparties connected with power procurement, generation and transmission requirements across Switch's development pipeline. Yondr has also arranged a multi-bank LC facility to support power requirements for projects in the United States and Europe. This is not conventional commodity trade finance. It is contractual credit support attached to infrastructure development. ## Semiconductor Procurement Adds Another Layer Power is only one constraint facing the AI infrastructure buildout. Data centers also require enormous volumes of semiconductors, servers, cooling equipment, electrical systems and related equipment. Suppliers may be asked to reserve manufacturing capacity against multi-year procurement commitments. GTR reported that letters of credit are already being used to support some large chip-purchase obligations. The logic is straightforward. A supplier allocating scarce capacity to a large order takes risk if the purchaser later fails to perform. Bank-backed credit support can therefore become part of the procurement architecture rather than merely a payment mechanism used at shipment. ## Why SBLC and Guarantee Demand Can Grow Even Faster Commercial documentary LCs and Standby Letters of Credit solve different problems. A documentary LC is normally intended to pay against presentation of complying documents. The bank examines the documents required by the credit and pays according to the instrument's terms. A Standby Letter of Credit generally operates as a fallback undertaking. It can support a payment obligation, lease obligation, power-purchase commitment, performance requirement or another contractual exposure where a beneficiary may draw following specified circumstances. Infrastructure investment creates obligations long before a normal shipment takes place. Power commitments, construction obligations, equipment contracts, lease obligations and capacity reservations can all require credit support. This helps explain why guarantee and SBLC demand can rise even where conventional commercial LC volumes remain comparatively modest. ## LC Demand Does Not Automatically Mean LC Availability Greater demand for letters of credit does not mean banks are issuing them indiscriminately. An issuing bank takes exposure to its applicant. The applicant may need an existing credit facility, cash collateral, eligible security or another acceptable reimbursement structure. Large facilities can consume meaningful bank limits and capital. Banks also review the beneficiary, underlying transaction, jurisdiction, sanctions exposure, contract terms and proposed instrument wording. For commercial documentary credits, drafting quality becomes particularly important. Banks deal in documents rather than the underlying goods. A commercially successful shipment can still create a documentary problem if the beneficiary cannot present what the credit requires. The International Chamber of Commerce's [UCP 600 rules](https://2go.iccwbo.org/ucp-600-uniform-rules-for-documentary-credits-config-1.html?ref=financelygroup.com)provide the core international framework used for documentary credits, while [ISBP 821](https://2go.iccwbo.org/subjects/international-standard-banking-practice-isbp-1.html?ref=financelygroup.com)provides more detailed guidance on examination of documents presented under those credits. ## The Resurgence Creates Financing Opportunities Around the LC The value of an LC extends beyond payment assurance. A properly structured documentary credit can become part of the financing architecture surrounding a trade. Depending on the issuing bank, tenor, wording, beneficiary rights and transaction structure, exporters may be able to obtain confirmation, discount a deferred-payment undertaking or use expected proceeds within a structured financing arrangement. Importers can use usance structures to obtain additional time before reimbursement. UPAS structures can allow the supplier to receive payment at sight while the buyer repays the financing bank at a later maturity. Commodity traders can sometimes structure purchase-side financing around a credible sales contract and LC-backed payment flow. This is where [structured trade finance](https://www.financely.io/structured-trade-finance-advisory?ref=financelygroup.com)and documentary credit structuring increasingly overlap. ## What the 2026 Market Actually Looks Like The simplest description of the current market is that traditional trade finance has become useful again in places where commercial trust has become more expensive. | Market Factor | 2026 Direction | Likely Effect | | ------------------------------------ | ----------------- | ------------------------------------------------ | | Established high-trust relationships | Stable | Open account remains dominant | | New cross-border counterparties | Increasing | Greater use of LCs and confirmation | | Geopolitical uncertainty | Elevated | Higher value placed on bank-backed certainty | | AI and data-center infrastructure | Rapid growth | Large SBLC and performance-LC requirements | | Strategic semiconductor procurement | Growing | LCs support longer-term supply commitments | | South-South trade | Growing | More documentary risk mitigation | | Bank capital discipline | Still restrictive | Demand does not remove underwriting requirements | ## This Is Not a Return to 1995 The letter of credit has not regained its old position as the default method for international trade, and it probably will not. Digital open-account solutions, supply-chain finance, receivables finance, credit insurance and deeply integrated multinational supply chains have permanently changed the market. The more significant development is that the LC no longer looks obsolete. The instrument is proving useful in precisely the sectors driving some of the largest capital commitments in the global economy. Utilities want credit support from data-center developers. Semiconductor suppliers want protection around major procurement commitments. Commodity suppliers want payment certainty from new buyers. Companies entering unfamiliar markets want protection against counterparty and jurisdictional risk. The common factor is not nostalgia for documentary trade finance. It is the increased economic value of certainty. For banks, that creates opportunities in issuance, confirmation, guarantees, discounting and structured trade lending. For corporates, it creates another tool for preserving liquidity while meeting increasingly demanding contractual credit-support requirements. Need to Structure an LC, SBLC or Trade Facility? Financely works with importers, exporters, commodity traders and operating companies on documentary credits, Standby Letters of Credit, confirmation, discounting, trade loans and structured trade-finance transactions. [Request a Quote ](https://www.financely.io/requestaquote?ref=financelygroup.com) Primary Sources and Further Reading - [Federal Reserve — Trade Finance Activities of U.S. Banks](https://www.federalreserve.gov/econres/notes/feds-notes/trade-finance-activities-of-u-s-banks-what-the-data-can-tell-us-20260508.html) - [Global Trade Review — The Return of the Letter of Credit](https://www.gtreview.com/news/global/the-return-of-the-letter-of-credit/?ref=financelygroup.com) - [Global Trade Review — Banks See Strong Trade Loan Demand](https://www.gtreview.com/news/global/trade-finance-results-banks-see-strong-loan-demand/?ref=financelygroup.com) - [Global Trade Review — Data Centers Drive LC Demand](https://www.gtreview.com/news/americas/demand-for-letters-of-credit-surges-as-data-centres-scramble-for-power/?ref=financelygroup.com) - [International Chamber of Commerce — UCP 600](https://2go.iccwbo.org/ucp-600-uniform-rules-for-documentary-credits-config-1.html?ref=financelygroup.com) Financely provides corporate finance advisory and trade-finance structuring services. Financely is not a bank and does not itself issue letters of credit, Standby Letters of Credit or guarantees. Issuance, confirmation, financing and other regulated financial services remain subject to independent underwriting, KYC, AML, sanctions review, credit approval and documentation by the relevant regulated institution. Nothing in this article constitutes a commitment to finance or issue an instrument.