Letter of Credit

A bank guarantee that a seller will be paid once agreed shipping and documentary conditions are met.

Definition

A bank guarantee that a seller will be paid once agreed shipping and documentary conditions are met.

A Letter of Credit (LC) is a written commitment issued by the buyer's bank guaranteeing that the seller will receive payment, provided the seller presents the exact documents specified in the LC (such as the Bill of Lading, commercial invoice and inspection certificate).

The Letter of Credit reduces risk for both parties: the exporter is assured of payment by a bank rather than relying on the buyer's creditworthiness, while the importer is assured that payment is released only after the goods are shipped and documents are in order.

Irrevocable LC — cannot be changed without agreement of all parties.
Confirmed LC — a second bank adds its own payment guarantee.
Sight LC — payment is made as soon as compliant documents are presented.

Example usage

For a first order with a new overseas buyer, the exporter requests an irrevocable Letter of Credit at sight to guarantee payment before shipping.

Also known as

LCdocumentary creditbank letter of credit

Frequently asked questions

Yes. A Letter of Credit shifts the payment guarantee from the buyer to the buyer's bank, so the exporter is paid once compliant documents are presented, regardless of the buyer's own cash position.

A sight Letter of Credit pays the exporter as soon as compliant documents are presented. A usance (or deferred) LC pays after an agreed credit period, for example 60 or 90 days after shipment.

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