What is an LC vs Open Account calculator?
An LC vs Open Account calculator helps exporters compare two very different ways of getting paid. Under a Letter of Credit, the exporter receives payment subject to the credit's terms and compliant document presentation, while Open Account generally puts more payment-timing and buyer-credit risk on the exporter. The cheaper-looking option is not always the cheaper economic option once financing, insurance, bank fees and payment risk are considered.
This free Today Adviser calculator lets you model the invoice value, LC and Open Account payment days, bank charges, insurance or confirmation costs, financing rate, customer advance and an optional expected-loss allowance. The goal is not to declare one payment method universally better. It is to quantify how a change in payment terms can affect the exporter's economics.
LCs and open-account exports can have very different operational and risk profiles. Trade-finance platforms and banks currently provide separate workflows for export LC advising, export bill realization, packing credit, import/export collections and other trade products, reflecting that these payment methods are handled differently in practice.
Why compare Letter of Credit and Open Account terms?
Export buyers often prefer Open Account because it is simple and gives them payment time. Exporters may prefer an LC when they need stronger documentary payment mechanics or bank involvement. The right decision depends on buyer quality, country risk, transaction size, competitive pressure, financing needs and the exporter's risk appetite.
A payment term also affects working capital. A 90-day open-account receivable can keep cash tied up for much longer than a sight LC. That does not automatically make the LC cheaper, because the LC can carry bank charges, advising costs, document handling charges and, where applicable, confirmation or financing costs. The calculator makes both sides visible.
For a deeper funding analysis, combine this tool with the Free Export Working Capital Calculator and the Free Export Invoice Financing Calculator.
How the LC side of the calculation works
The LC model adds the entered LC percentage costs and fixed fees, then estimates a time-based financing or opportunity cost for the portion of operating cash tied up until the modeled LC payment date. Enter 0 days for a sight-payment scenario or the appropriate usance period for a credit LC.
This is deliberately simplified. Real LC economics can include advising commission, discrepancy charges, negotiation or discounting charges, confirmation fees, amendment fees, reimbursement or correspondent charges, document courier and other bank-specific items. For a more detailed view of LC banking cost, use the Free Letter of Credit Cost Calculator.
Bank tariffs show why a configurable model is necessary. HDFC Bank currently publishes separate LC-related documentation, commission and SWIFT/courier charges in its export trade service schedule, while other banks publish different structures.
How the Open Account side of the calculation works
The Open Account model uses the longer collection period as a working-capital cost and adds any bank fees, insurance cost and optional expected-loss allowance you enter. That expected-loss allowance is not a prediction generated by the calculator; it is a user-defined risk budget for stress-testing a buyer or market.
Open Account terms can be commercially attractive because they may help win or retain customers. But the exporter is carrying a receivable for the credit period and may have to finance that receivable. When the buyer asks for 60 or 90 days, the exporter should calculate the financing effect instead of treating the extra credit as free.
If buyer default or political risk is a concern, model an insurance premium using the Free Export Credit Insurance Premium Calculator and then compare the insured Open Account scenario with the LC scenario.
Financing cost can change the answer
Two payment methods can have identical invoice values and very different cash-flow consequences. Suppose an exporter can collect under an LC in 30 days but the buyer wants 90-day Open Account. A 60-day difference on a large receivable can create a meaningful financing burden. If the exporter already has inexpensive working capital, the incremental cost may be manageable. If liquidity is tight, the same payment term can become expensive.
The calculator estimates the time cost using a straightforward model: cash tied up × annual financing rate × days ÷ 365. It is a planning model, not a bank's exact discounting or borrowing formula. Use your actual funding rate where possible.
For a detailed invoice-financing scenario after shipment, use Today Adviser's Free Export Invoice Financing Calculator. For the complete order cash cycle, use the Free Export Working Capital Calculator.
LC confirmation vs Open Account insurance
Confirmation and credit insurance can both be used to address risk, but they are not interchangeable products. An LC is a documentary payment mechanism, while confirmation involves another bank adding its undertaking subject to the credit's conditions. Export credit insurance, by contrast, can be structured to cover defined commercial and political risks under an insurance policy.
Do not enter an LC confirmation cost and an insurance premium into the same side unless that is genuinely how your proposed structure is priced. The tool lets you enter them separately so you can model different packages. The final legal and financial effect depends on the actual wording of the LC, insurance policy and bank contract.
For current product-specific terms, check your bank and insurer. Today Adviser calculators are designed to make the economics easier to understand before that conversation.
How payment terms affect export pricing
An exporter should often treat payment terms as part of the price negotiation. A buyer asking for Open Account 90 days may be offering the same nominal product price as another customer who pays under sight LC, but the first transaction can consume more working capital and create more credit exposure.
Calculate your target margin first. Then add the financing and risk cost of the requested payment term. If the buyer insists on longer credit, you can calculate what price adjustment would preserve the same commercial outcome. The Free Export Profit Calculator and Free Export Break-Even Price Calculator are useful for this next step.
This approach turns a vague “Can we give 90 days?” discussion into a measurable commercial decision: what does the extra 60 days cost us, and what price or security would make that trade acceptable?
Common mistakes when comparing LC and Open Account
- Comparing only bank fees and ignoring working-capital cost.
- Treating all LC costs as one flat percentage when actual tariffs contain separate components.
- Ignoring insurance or buyer-risk costs under Open Account.
- Using the invoice value rather than the cash actually tied up in the order.
- Assuming a buyer's promised payment date is the same as actual realization date.
- Forgetting amendment, discrepancy, confirmation, document and courier charges.
A good comparison uses the same invoice amount, the same expected shipment date, the same funding rate and realistic payment timing. Then add transaction-specific charges from the actual bank quote.
Related free Today Adviser tools
For LC economics, use the Free Letter of Credit Cost Calculator. For documentary collections, compare with the Free Documentary Collection Cost Calculator. For export receivable funding, use the Free Export Invoice Financing Calculator.
For buyer-risk protection, use the Free Export Credit Insurance Premium Calculator. For overall cash-flow planning, use the Free Export Working Capital Calculator. For price and margin analysis, use the Free Export Profit Calculator.
When the payment route changes the foreign-exchange exposure, also use the Free Export Currency Hedging Calculator and Free Foreign Remittance Charges Calculator.
Frequently Asked Questions
Which is cheaper, LC or Open Account?
Neither is universally cheaper. An LC can carry more bank charges, while Open Account can create more financing and buyer-credit exposure. This calculator estimates the all-in scenario using your own assumptions.
Is Open Account riskier for an exporter?
It can place more payment risk and financing exposure on the exporter because the exporter generally waits for the buyer to pay under the agreed credit period. The actual risk depends on the buyer, country, contract, insurance and other protections.
Does a Letter of Credit eliminate all export risk?
No. An LC operates under its terms and documentary requirements. Discrepancies, issuing-bank risk, country risk, confirmation structure and other conditions can still matter.
Can I compare sight LC with 90-day Open Account?
Yes. Set LC payment days to 0 and Open Account payment days to 90, then enter the applicable fees and financing assumptions.
What is the expected credit-loss allowance?
It is an optional scenario input that lets you assign a risk budget to Open Account receivables. It is not a probability calculated or recommended by Today Adviser.
Should insurance be included in the comparison?
Yes, when insurance is part of the actual payment-risk structure. Enter the estimated or quoted percentage for each scenario and compare the resulting total cost.
Does the calculator use real bank LC charges?
No. Enter the bank-specific fees from your quote or tariff. Bank schedules differ by institution, product, currency and transaction structure.
Can this help negotiate payment terms with a buyer?
Yes. Use it to quantify the extra financing and risk cost created by longer credit terms, then use that amount as an input to your pricing or payment-term negotiation.
Can importers use this calculator?
The current model is designed primarily for exporters comparing customer-payment structures. Importers can use the underlying cost logic for supplier-payment scenarios, but the risk interpretation is different.
