When a Revolving LC Keeps Turning — and When It Stops

Intro:

Every once in a while, a question pops up that seems simple but opens a door into the practical logic behind trade finance. This one came from Max, who was planning to use a revolving letter of credit for regular shipments and wanted to understand how the “cumulative” and “automatic” features actually work in real life.

Question from Max

Dear Mr. Old Man,

I’m planning to propose a revolving letter of credit to a customer. The customer is financially sound, and we expect to trade regularly — around USD 1.6 million per month for a year, corresponding to 1,000,000 units each month.

The LC would be cumulative and automatically revolving.

I have a few doubts:

1. When exactly are payments made — for example, if the LC is payable at sight or 60 days after the B/L date, is there any difference compared to a normal LC?
2. Since it’s automatically revolving, do we or our banks have to do anything after each period?
3. If I deliver less in one month (say 900,000 units), can I make up for the shortfall in the following months?
4. And what if by the last period, I still haven’t shipped everything — does the LC continue automatically?

Thank you in advance for your help!

— Max

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Answer from Mr. Old Man

Hi Max,

Nice question — revolving credits can sound complicated, but once you break them down, the logic is quite straightforward.

First, you’re right: the payment mechanism under a revolving LC is no different from that under a normal LC. If the documents presented to the issuing bank are in full compliance, the bank will:

• Pay at sight if the LC is available by sight payment; or
• Incur a deferred payment undertaking (or accept a draft) and pay at maturity if it’s available by deferred payment or acceptance (e.g. 60 days after B/L date).

Now, because your LC is automatically revolving, the available amount is reinstated for the next period (month, quarter, or whatever the cycle is) once the previous amount has been drawn or utilized. No amendment is needed — the LC “revolves” on its own.

As it’s also cumulative, any unused balance from one period can be carried forward to the next.

For example:

If you ship and draw USD 1,500,000 in the first month, you can ship and draw up to USD 1,700,000 in the second month — that’s the new USD 1,600,000 for that month plus USD 100,000 carried over from the previous period.

However, keep in mind that this flexibility ends when the LC itself expires.

If the last shipment isn’t made within the overall validity of the LC, any remaining balance lapses automatically — the LC does not continue beyond its stated expiry date unless it’s formally extended by the applicant and the issuing bank.

In short:

• Payment: Same as any normal LC.
• Revolving: Automatic, no amendment required.
• Cumulative: Unused amounts can roll over to the next period.
• Expiry: Once expired, the LC stops revolving.

Hope that clears it up — and good luck with your proposal!

Best regards,

Mr. Old Man