Letters of Credit (LC)
Bank-issued payment guarantees ensuring exporters receive payment when documentary conditions are met. A cornerstone of international trade finance.
What is a Letter of Credit?
A Letter of Credit is a formal bank commitment to pay a beneficiary (exporter/seller) upon presentation of specified documents proving that goods have been shipped in accordance with agreed terms. The LC reduces payment risk by substituting the bank's creditworthiness for the buyer's.
LCs are governed by the International Chamber of Commerce's Uniform Customs and Practice for Documentary Credits (UCP 600), ensuring consistent interpretation across jurisdictions.
The LC mechanism enables both exporters and importers to transact with confidence, particularly in high-value or unfamiliar trading relationships.
Key Concepts
Parties to an LC
Buyer, seller, issuing bank, advising bank, and confirming bank coordinate the transaction structure.
Documentary Compliance
Strict adherence to LC terms ensures payment is released only when conditions are met.
Common LC Variants
Revocable, irrevocable, confirmed, and standby structures address different transaction risks.
LC Transaction Mechanics
LC Application
Buyer applies to issuing bank; seller and buyer agree LC terms
Issuance
Issuing bank commits to pay upon compliant presentation
Advice
Advising bank notifies seller of LC receipt and authenticity
Shipment
Seller ships goods per buyer's instructions
Documentation
Seller submits required documents (invoices, bills of lading, etc.)
Examination
Bank examines documents for compliance with LC terms
Payment
Bank releases payment upon document acceptance
Risks & Operational Considerations
Documentary Risk
Discrepancies in documents may result in non-payment. Careful drafting and strict adherence to LC terms is critical.
Issuing Bank Risk
Credit quality of the issuing bank is critical. Confirmation by a reputable bank adds an additional layer of security.
Amendments
LC amendments may be costly and require agreement from all parties. Consider commercial impact early.
Cost Considerations
LC issuance fees, amendments, and confirmations add to transaction costs. Clear allocation in commercial terms is essential.
Need LC Coordination Support?
Contact Multistream International for professional trade finance advisory and structured LC coordination.