Payment
What is a Letter of Credit?
Letter of Credit (L/C) is a bank payment undertaking for trade — types, parties, and document compliance.
An L/C is a conditional bank promise to pay the beneficiary when compliant documents are presented.
Definition
A Letter of Credit (L/C) is a written undertaking by a bank (issuing bank) at the request of the buyer (applicant) to pay the seller (beneficiary) a stated amount if documents strictly comply with L/C terms.
It shifts payment risk from buyer credit to bank credit — widely used in first-time or high-value export deals.
Parties and Flow
Applicant (buyer), beneficiary (seller), issuing bank, advising bank, confirming bank (optional). Seller ships and presents docs to bank; bank checks compliance before payment.
Discrepancies → refusal or buyer waiver — major source of export disputes.
Common Types
Irrevocable L/C (UCP 600 default), confirmed L/C (confirming bank adds guarantee), at sight vs usance (deferred payment).
Special forms: transferable, standby — each changes risk allocation.
Documents Under L/C
Typically commercial invoice, packing list, B/L or AWB, certificate of origin, insurance — all must match L/C fields (latest shipment date, ports, descriptions).
Align Incoterms with who pays freight/insurance on documents.
Examples
Discrepancy
B/L dated one day after latest shipment date — bank refuses until buyer accepts discrepancy.
Confirmed LC
Exporter in high-risk country requests confirmation — second bank guarantees payment.
FAQ
- Is L/C same as bank guarantee?
- No — L/C pays against compliant trade documents; guarantee covers performance/default differently.
- Who pays L/C bank fees?
- Split per contract — applicant often pays opening, beneficiary may pay negotiation.
- Can L/C be amended?
- Yes with all parties consent — delays shipment if not coordinated.
- Soft clause risk?
- Clauses requiring buyer approval give buyer control — avoid when possible.
- L/C under FOB?
- Common — seller must still meet B/L requirements in L/C text.
Conclusion
Master UCP 600 and document match before production. Compare with T/T Payment and L/C vs T/T.