The Bank Is Holding Money Against a Shipment Your System Has Never Heard Of
· 7 min read · Written by Faceela Research & Editorial Team
Reviewed by Ahmed Hassan Algammal — Founder and Enterprise Systems Consultant
A trading business does not run on cash. It runs on a facility.
The facility says how much can be opened in letters of credit at once, how much of each shipment the bank will fund, how long the trust receipt runs, what margin is held in cash, and what the whole thing is secured against. Every buying decision of any size is really a decision about that document.
And in the overwhelming majority of trading companies, none of it is in the system. The facility letter is a PDF. The utilisation is a screen on the bank's portal. The limit is known by one person, approximately, and the answer to can we open another LC this week is a phone call.
What a letter of credit actually does to your books
It creates obligations at four separate moments, and most systems record only the last one.
| Moment | What happens | Usually recorded? |
|---|---|---|
| LC opened | Facility utilised; cash margin blocked; issuance fee charged | No |
| Documents presented | Bank pays the supplier; your liability crystallises | No |
| Trust receipt drawn | Debt to the bank begins, with a due date and interest | Sometimes |
| Goods received | Stock rises; supplier invoice booked | Yes |
The gap between row one and row four is six to ten weeks, and during it the company has committed cash it cannot use, taken on a liability that is not on the balance sheet, and reduced a limit that governs every subsequent purchase — with no record of any of it.
This is why the surprise always takes the same shape. A buyer negotiates well, agrees a good price on a large order, and the LC is refused because the limit is full. The purchase was sound. The constraint was invisible.
Four moments, one letter of credit
Everything has happened by the time the system hears about it
1. The LC is opened
Facility: The line is consumed that day, in full, and every purchase after it is measured against what is left.
Cash: The margin is blocked. It is your money, you cannot spend it, and the treasury report still counts it as available.
Liability: An undertaking to pay exists, and an issuance commission with it. Neither is on the balance sheet.
In the system: No
2. The documents are presented
Facility: Still consumed. Nothing has been released.
Cash: The bank pays the supplier. If the documents do not match the LC terms, a discrepancy fee is charged for a failure of typing.
Liability: It crystallises. You now owe the bank rather than the supplier.
In the system: No
3. The trust receipt is drawn
Facility: Converted out of the LC line and into a dated loan.
Cash: Interest runs for every day it is outstanding, and the days are not free.
Liability: A debt with a maturity date, which belongs in the short-term repayment schedule and rarely reaches it.
In the system: Sometimes
4. The goods are received
Facility: Unchanged by this event. It moved weeks ago.
Cash: Nothing happens here either. It happened at the first moment and the third.
Liability: Stock rises and the supplier invoice is booked.
In the system: Yes
Six to ten weeks separate the first moment from the last. Three of them have already changed what the company is able to spend, and the system's first entry is the fourth.
And the cost of the four does not reach the goods either
The issuance commission, the amendment fee, the discrepancy fee, the acceptance commission, the interest for the days the trust receipt ran and the spread on conversion all arrive on a bank statement, on different dates, in bank shorthand. Coded to bank charges, none of them reaches the shipment — so the landed cost of an LC-financed container is short by the cost of financing it.
The four numbers a trading company should be able to read daily
- Facility limit and current utilisation, by facility type, because an LC line and an overdraft line are not interchangeable.
- Cash margin blocked, which is company money the treasury report counts as available and the bank does not.
- Trust receipts outstanding with their maturity dates, which is the real short-term repayment schedule and rarely matches the one in the cash flow forecast.
- Committed but unshipped value — LCs opened against goods still at the supplier, which is a purchase commitment nobody can cancel.
None of these are hard to compute. All of them require the LC to exist as a record linked to a purchase order and a shipment, rather than as a folder in a drive.
Once it does, the two reports that matter fall out of it for nothing: utilisation against limit at any date, and a maturity ladder of trust receipts against expected receipts from customers. That second one is the whole of a trading company's liquidity question, and it is normally assembled by hand, in a spreadsheet, by the finance manager, on the morning it is needed.
Where the cost hides
Trade finance charges are not one fee. They are an issuance commission, an amendment fee, a discrepancy fee, acceptance commission, interest on the trust receipt for the days it runs, and an FX spread on conversion — six charges, arriving on a bank statement, on different dates, described in bank shorthand.
Coded to bank charges, as they almost always are, they never reach the goods. So the landed cost of an LC-financed shipment is understated by the financing cost of financing it, which is precisely the comparison a buyer needs when a supplier offers a discount for cash against 90-day terms.
The discrepancy fee deserves its own note. It is charged when presented documents do not match the LC terms, it is entirely a documentation failure, and it is paid so routinely that most companies treat it as a cost of trading. It is not. It is a measurable, attributable, repeat error, and a system that shows it per shipment and per supplier stops it inside two quarters.
What to make a vendor show you
- Create an LC as a record against a purchase order, with its terms, margin and expiry.
- Show facility utilisation move when it is opened — before any goods exist.
- Draw a trust receipt against it and produce the maturity schedule.
- Post the issuance fee and the interest onto the shipment's landed cost, not to bank charges.
- Refuse to open an LC that would breach the limit, and show who can override.
- Produce utilisation against limit for a past month-end, and reconcile it to the bank's statement.
Item 6 again, and for the same reason as everywhere else in this cluster: a figure that only works going forward is a dashboard. A figure that can answer for last March is a control.
The short version
The facility, not the bank balance, is what a trading company can actually spend. Letters of credit consume it weeks before the goods exist, trust receipts turn it into dated debt, and cash margin makes part of your own money unavailable while your treasury report still counts it.
None of that is normally in the ERP, so the limit is discovered rather than managed, and the financing cost of a shipment never reaches the shipment.
Putting the LC on the purchase order is a small change. It converts the most important constraint in the business from a phone call into a number.
Where this fits with the rest of a trading system — the warehouse, the customs file, the landed cost — is Logix, and the case for the whole shape is ERP for trading and distribution in the UAE.