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Author's profile photo Colin Thomas

Trade Finance Letter of Credit (Buy & Sell) in SAP Treasury


A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

(Source Investopedia)

This blog explains the Letter of Credit (Buy and Sell) process in SAP and accounting in SAP using SAP Treasury & Risk Management process. SAP has standard solution for letter of credit “Trade Finance”.  SAP Trade Finance is available from SAP 6.0 EHP8 onward. In this blog the scenario used is Commercial letter of credit directly paid by banks.

User Story

Lee is procurement manager responsible for placing Purchase Order for raw material involved in manufacturing of Copper insulated wires. At times Lee had to raise purchase order for procuring raw material Copper from distant vendor. As copper is a commodity which is traded in commodity markets such as LME (London Metal Exchange), COMEX and Shangai Futures Exchange. As the rates of copper is driven by market rates, Lee has to ensure that the rate and quantity of purchase is fixed. As the vendor is from another country, to avoid the vendor payment risk and vendor country’s legal requirements, Lee enters into a Letter of Credit agreement with the business partner.

Lee approached his finance counter part (Rohan). Rohan explain Lee the IFRS standard requirement

  • Disclosure of Letter Credit as Contingent Liability (IFRS 4-Financial guarantee contracts and credit insurance)

Business Requirement

As per business requirement, Lee raises a purchase order against an LC payment and approaches Rohan to negotiate and process the Letter of credit with CITIBANK. The payment against the purchase order will be done based on the delivery of goods at Munich port.

On receipt of bill of lading and Invoice, payment will be released (LC payment). Payment will be done to the issuing/obligatory bank which will forward the payment to recipient bank. Recipient bank pays the vendor. On next bank statement, CITIBANK debits (payment against LC to the receiving bank). Vendor should be credited once the LC payment is debited on bank statement.

Letter of credit details to be sent to bank and confirmation to be sent via SWIFT message.

Fig: 1 Source: – International Chamber of Commerce

LC accounting process should compile as per IFRS accounting standards

  1. Disclosure of Letter Credit as Contingent Liability (IFRS 4-Financial guarantee contracts and credit insurance)

SAP Solution

Fig: 2

Letter of Credit Process in SAP Trade Finance

Fig: 3

Contract with Issuing Bank – Issue of LC

Fig: 4

Fig: 5

Credit limit check of counterparty (CITIBANK)Fig: 6

Presentation of LC with Issuing bank

Fig: 7 (Standard SAP Workflow can be used for settling the contract)

Contingent Liability is created

Dr 194200 – TR-TM Clearing A/c

Cr 159100 – Contingent Liability

Fig: 8

Presentation of LC with Issuing bank


Presentation of LC


LC Presentation to bank (Payment obligation)

Fig: 11


LC Presentation to bank (Acceptant Payment)


LC Presentation to bank (Acceptant Payment)

Fig:14 (Issuing bank is CITIBANK and Advising/Recipient bank is JP Morgan considered as example in this blog)

On Due date LC payments

Note: – All the dates represented only for demonstration purpose.

Fig:15 (Counterparty CITIBANK is linked with customer 5000010099)

On Due date Vendor payment

Fig:16 (Vendor payment accounting based on the bank statement received on next day of payment processing to Recipient bank)

Letter of Credit (Sales Process)


Presentation of LC with bank


Presentation of LC with Advising bank


Intimation to issuing bank

PDF document can be generated and automatically send the email address maintained on Business partner master data.

Fig:20 (Sample used for this blog, Prior initiation to bank for entering into a LC contract)

LC Accounting in Treasury system


LC Presentation to bank (Acceptant Payment)


On Due date LC payments

Fig:23 (Counterparty CITIBANK linked with customer 5000010099. LC Sales is against ABC Forwarder)

Fig:24 (Payment credited to Customer based on the bank statement, LC payment received by issuing bank)

Additional Information

  • Integration with SWIFT/Open Text/Block Chain for communication with Counterparty
  • Correspondence (MT700* as per ISO standards) for following can be triggered
    • LC Contract
    • Settlement
    • Presentation
    • Presentation acceptance
  • Payments via SWIFT
  • Full automation of accounting entries (Bank statements/Treasury module)
  • LC Fee accounting can be integrated
  • Limit Management of SAP can be extended to counterparty limits


Accounting entries might change based on the client requirements. All the accounting entries depicted in the blog are for representation to align with LC standard process.


SAP Trade Finance covers the complete solutions for Letter of Credit process both Buy & Sell. Entire process is automated using standard SAP workflow process, automatic matching of contracts using SWIFT MT format for communication with the banks to avoid risk of manipulation using workflow and with full automation of Letter of Credit Process.



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      Author's profile photo Sanil Bhandari
      Sanil Bhandari

      This is a very useful information. Thanks a lot for sharing Colin Thomas

      Best Regards

      Sanil Bhandari

      Author's profile photo VENKATESH B

      Very informative..Thanks for sharing. Best Regards/ Venkatesh

      Author's profile photo VENKATESH B

      Hi Colin,

      Could you pl share the above account determination config in trade finance Letter of credit.  Thanks in advance.

      Best Regards / Venkatesh

      Author's profile photo Colin Thomas
      Colin Thomas

      Thank you Venkatesh for reviewing the blog. As mentioned in the blog, Account purely depend on business requirement. However, sharing the update types and accounts assigned to it for your reference. Rest are all the standard settings

      Author's profile photo Colin Thomas
      Colin Thomas
      Blog Post Author

      Hello Venkatesh


      I don't have the system now. However, its pretty much standard Treasury configuration.



      Author's profile photo venkatesh bhandari
      venkatesh bhandari

      Thanks a lot Colin!

      In my project, though we are having both LC and BGs with transaction type 200, account postings are not applicable as per the business requirement.  Update types are configured in such a way.

      Exploring the business requirements on its GL postings.

      Best Regards / Venkatesh


      Author's profile photo Sungho Park
      Sungho Park

      Hi Colin

      Thanks for your excellent blog about Trade finance LC.

      I am having little problem in my Trade Finance configuration. I am not how I can setup special GL and special GL indicator configuration. I tried many ways no luck. Definitely I am missing something here.

      Every time I posted it is giving me special gl indicator error msg.

      "Special G/L indicator not defined or incorrect."

      I have Defined special GL indicator and Assigned it with customer reconciliation GL account in FBKP.

      Assigned posting key in Account Determination 09 and 19.

      last Few days i couldn't solve it.

      Please help me with details configuration steps.

      Please email me details at

      Looking forward to your kind response




      Author's profile photo Bhavik Rajput
      Bhavik Rajput

      Good document.

      Author's profile photo John Keells IT Support
      John Keells IT Support



      In my case, i am unable to see the presentation tab to key the data.


      Any clue on that?





      Author's profile photo Colin Thomas
      Colin Thomas
      Blog Post Author

      Apologies for delay in response. I believe, there is some filed which is mandatory is not update. As I can't see your screen, it is difficult comment.


      Author's profile photo Sandip shankariya
      Sandip shankariya



      LC value check at Sales order and it is clear . But again it is checking to delivery level from BP credit limit.


      we need to skip delivery level Credit check when order against LC.


      Author's profile photo Sandip shankariya
      Sandip shankariya



      LC value check at Sales order and it is clear . But again it is checking to delivery level from BP credit limit.


      we need to skip delivery level Credit check when order against LC.


      Author's profile photo Mia Wenjuan Guo
      Mia Wenjuan Guo

      Hi Colin,

      Thanks a lot. Great document.

      May I ask in SAP, the discharge port/ shipping term and incoterm was verifying when assign L/C to an order. Do you know how to skip the verification as the discharge port/inco term may changeable or Blank in business world.


      Thanks a lot.


      Author's profile photo Colin Thomas
      Colin Thomas
      Blog Post Author

      Hello Mia

      To best of my understanding SAP Treasury Trade Finance is not integrated with SD/MM modules. In LC deal incoterms is not a mandatory field. The above blog is written from SAP Treasury Trade Finance point of view. I believe you are processing LC in purchase cycle which is not covered under this blog.


      Thank you


      Author's profile photo Kanchan Rokade
      Kanchan Rokade

      Could you please share  E2E configuration documents for Letter of credit?

      Email ID -

      Author's profile photo Mubarak Ali Baig
      Mubarak Ali Baig

      Dear Thomas,


      Its' good document with respect FI view. Is it possible to share the Integration part from MM perspective. So that it will be helpful.


      Thank You

      Author's profile photo Neelamraju Ramakrishna Prasad
      Neelamraju Ramakrishna Prasad

      Dear Thomas,

      Would you please help me to add the below fields in Letter of Credit (FTR_CREATE/ FTR_EDIT)

      1. How to enable INCO2_L field  structure tab for Sales flow?
      2. Is there any possibility to add Payment terms (ZTERM) field for Sales flow
      3. Is there any standard report available to map LOC Deal transaction number with Financial document?

      Thanks in advance for the clarificaitons.

      Thank you,

      Ramakrishna Prasad. N

      Author's profile photo S. Nilakantan
      S. Nilakantan

      HI FOLKS do we need sap additional license for using FTR_CREATE FOR Letter of credit creations.

      Author's profile photo RAJEEV UPPAL

      Hi Colin

      Could you please share end to end configuration document in Letter of Credit. I am struck up in Advance Payment ( Presentation ) part. Thanks Rajeev Uppal