Insights · Explainer · for anchors, financiers
Letters of credit, open account and supply chain finance: matching the instrument to the trade
The instruments are old and well understood. What has changed is where supply chain finance fits among them, and when it is the better tool.
Mtaji Insights
Published 31 October 2026. 2 min read.
Written by the Mtaji Insights desk and checked against Mtaji’s product terms and publication rules before release. Editorial standards
In brief
- Letters of credit, documentary collections and open account trade protection against cost and friction in different measures.
- Most trade between an anchor and its suppliers and distributors runs on open account, which is where cash runs short.
- Supply chain finance funds open account at those points. A confirmation establishes the trade; it is not a guarantee.
A business that trades chooses how it will be paid, and a financier chooses how to support it. The instruments are familiar: letters of credit, documentary collections, guarantees and open account. What has changed is where supply chain finance sits among them.
A range of trust between two parties
A letter of credit puts a bank’s promise between the parties: the seller is paid if it presents documents that comply. It gives the most protection and costs the most in fees, paperwork and time. A documentary collection uses banks to exchange documents for payment, with no bank promise behind it. Open account is the simplest: goods move, an invoice follows, and the seller waits for payment on agreed terms. It protects the seller least and asks least of both sides.
Why most anchor trade runs on open account
Between a large company and the small businesses it buys from and sells to, trade is repeated, mostly local or regional, and built on relationships. A letter of credit on every delivery would cost more than it protects. So most of this trade runs on open account, and that is where the working capital strain sits: a supplier waits for its invoice to be paid, and a distributor needs stock before it has the cash.
Open account, with funding where cash runs short
Supply chain finance keeps the simplicity of open account and adds funding at the points where cash runs short. An approved invoice can be paid early. A confirmed order can be funded before the goods are made. A distributor can buy stock on a facility. The anchor’s confirmation does part of the work a letter of credit does, by establishing that the trade is real, without a bank promise on every shipment.
That difference matters. A confirmation is not a guarantee. Under reverse factoring the anchor carries the obligation. Under invoice discounting and purchase order financing the supplier does, with full recourse. Distributor finance is a credit facility to the distributor, with recourse to the distributor.
When the older instruments still fit
For a first shipment to an unfamiliar counterparty in another country, or a large one-off order, a letter of credit or a guarantee may still be the right choice. Where the parties trade repeatedly, documents are digital and the anchor confirms each step, supply chain finance usually fits better. Many businesses will use both, for different trades.
Paperwork still decides whether money moves
Whatever the instrument, the documents decide the outcome. Under a letter of credit, a discrepancy can delay or stop payment. In supply chain finance, an invoice that does not match the order or the delivery should not be approved, and an invoice that is not approved cannot be financed. Clean, consistent records are the cheapest risk control in trade.