Commercial documentary credits commonly incorporate the ICC Uniform Customs and Practice for Documentary Credits.
Letter of Credit Services
Use a Letter of Credit Without Letting Documentary Risk Kill the Deal
A Letter of Credit can secure payment, support supplier credit and create a financeable trade receivable. It can also delay or compromise payment when the wording, shipment terms or required documents do not match the commercial transaction. Financely helps importers, exporters and traders structure the LC correctly before those problems reach the bank.
- Structure import and export Letters of Credit
- Review draft LC wording before issuance
- Reduce discrepancy and documentary presentation risk
- Assess confirmation, sight, usance and UPAS structures
- Structure transferable and back-to-back LC transactions
- Evaluate LC discounting and financing against receivables
Submit the transaction, proposed LC terms and commercial requirement for review.
Banks examine the documentary presentation against the terms of the credit.
Documentary Letters of Credit are commonly issued through the banking system using an MT700 message.
Review the LC together with the underlying sale, funding requirement and banking structure.
Letter of Credit Meaning
What Is a Letter of Credit?
A Letter of Credit, also called an LC or documentary credit, is a bank undertaking issued on behalf of a buyer in favor of a seller. The issuing bank undertakes to honor a complying presentation when the beneficiary presents the documents required by the credit within the required timeframe and in accordance with its terms.
The important distinction is that a commercial Letter of Credit is documentary. The bank examines the required presentation rather than determining whether the underlying goods themselves were commercially satisfactory.
This is why drafting matters. A poorly constructed LC can require documents that are difficult to obtain, create contradictions between the sales contract and the credit or expose the exporter to avoidable discrepancy risk.
When to Use a Letter of Credit
Use an LC When Payment Risk Justifies a Bank Undertaking
Documentary credits are particularly useful where the exporter does not want to ship on open account, the importer does not want to make full advance payment or the size and risk of the transaction justify formal banking controls.
Limited Trading History
A bank undertaking can reduce the exporter’s reliance on the buyer’s unsecured promise to pay.
Country and Counterparty Risk
A properly structured banking arrangement can change how payment, country and issuing-bank risk are allocated.
Large Procurement Requirements
An acceptable LC can strengthen a trade transaction and may support pre-shipment or post-shipment financing.
Letter of Credit Process
How a Letter of Credit Works
The strongest LC transactions are designed at the contract stage. Buyer and seller should know what the credit needs to say before the applicant instructs the issuing bank.
Agree the Sale
Agree goods, price, Incoterm, shipping window, payment terms and documentary requirements.
Draft the Credit
Establish tenor, expiry, documents, presentation requirements and banking instructions.
Apply for Issuance
The importer instructs its bank to issue the Letter of Credit.
Issue the LC
The issuing bank transmits the documentary credit through the banking system.
Review Before Shipment
The exporter checks the issued credit and requests amendments where required.
Ship the Goods
The exporter performs the underlying commercial contract.
Present Documents
Required trade and transport documents are presented through the banking channel.
Receive Payment
A complying presentation is honored according to the availability and tenor of the credit.
Types of Letters of Credit
Match the LC Structure to the Trade
Different structures solve different commercial problems. The choice affects payment timing, bank risk, financing and the ability of an intermediary to pay suppliers.
| LC Type | How It Works | Typical Use | Main Structuring Issue |
|---|---|---|---|
| Irrevocable LC | The issued credit cannot simply be cancelled or changed by the applicant alone. | Standard international trade. | Terms must be workable before shipment. |
| Confirmed LC | Another bank adds its own undertaking in addition to the issuing bank. | Exporters concerned about issuer or country exposure. | Availability of confirmation depends on bank and country risk. |
| Sight LC | Payment follows a complying presentation without a long deferred tenor. | Exporters seeking earlier settlement. | Documentary compliance remains critical. |
| Usance LC | Payment occurs at an agreed future maturity. | Importers requiring supplier credit. | Exporter may require discounting. |
| UPAS LC | Exporter receives earlier payment while the importer receives deferred repayment terms. | Buyer working-capital optimization. | Requires an appropriate reimbursement and financing structure. |
| Transferable LC | The first beneficiary can request transfer to a second beneficiary when the LC expressly permits it. | Traders and intermediaries. | Transfer mechanics must fit the supplier transaction. |
| Back-to-Back LC | A separate secondary Letter of Credit supports payment to the supplier. | Intermediary trades requiring a separate supplier-facing LC. | Master and secondary credits must remain operationally aligned. |
| Revolving LC | Credit availability renews according to defined revolving terms. | Recurring supply contracts. | Revolving mechanics require precise drafting. |
| Standby Letter of Credit | Operates primarily as contingent support if an underlying payment or performance obligation is not met. | Credit support and contractual obligations. | It serves a different commercial function from a documentary commercial LC. |
Payment Timing
Sight LC vs Usance LC vs UPAS LC
Seller Wants Earlier Payment
The exporter presents compliant documents and receives payment according to the sight availability of the credit.
Buyer Wants Time to Pay
Settlement occurs at a future maturity such as 60, 90, 120 or 180 days.
Seller Wants Sight, Buyer Wants Usance
The banking structure bridges the mismatch between the exporter’s cash-flow requirement and the importer’s requested tenor.
Letter of Credit Confirmation
Confirmed vs Unconfirmed LC
Confirmation determines whether the exporter is relying solely on the issuing bank or also has the undertaking of an additional bank.
Unconfirmed Letter of Credit
The exporter principally relies on the issuing bank’s undertaking.
- Issuing-bank exposure remains relevant
- Country and transfer risk may matter
- May be appropriate for strong banking jurisdictions
Confirmed Letter of Credit
A confirming bank adds its own undertaking in addition to that of the issuing bank.
- Can mitigate issuing-bank exposure
- Can improve exporter risk acceptance
- Can support financing and discounting structures
Intermediary Trade
Transferable LC vs Back-to-Back LC
Traders often need to convert an end-buyer’s payment support into something that can support procurement from the actual supplier.
Transferable Letter of Credit
A transferable credit permits the first beneficiary to request that the bank make the credit available to one or more second beneficiaries, subject to the credit and applicable rules.
- Useful for qualifying intermediary transactions
- Master LC must expressly permit transfer
- Not every term can simply be changed during transfer
Back-to-Back Letter of Credit
A separate supplier-facing LC is issued as part of a credit structure supported by the master transaction and the trader’s banking relationship.
- Creates two separate documentary credits
- Shipment dates and documents must be tightly aligned
- Requires issuing-bank credit approval
Letter of Credit Documents
Every Required Document Creates a Compliance Obligation
Good LC drafting asks for documents that are useful to the transaction, objectively producible and controlled by appropriate parties.
Commercial invoice
Bill of lading
Air waybill
Multimodal transport document
Packing list
Certificate of origin
Insurance document
Inspection certificate
Weight certificate
Quality certificate
Beneficiary certificate
Transaction-specific certificates
Letter of Credit Discrepancies
Reduce Documentary Problems Before the Shipment Leaves
A discrepancy can delay payment, trigger waiver requests or create additional exposure for the exporter. Prevention starts with the draft LC.
| Common Problem | What Goes Wrong | How to Reduce the Risk |
|---|---|---|
| Goods description mismatch | Required documentary data conflicts with the LC. | Align documentary wording before issuance. |
| Late shipment | Shipment occurs after the latest permitted date. | Use realistic shipment windows and amend before expiry. |
| Late presentation | Documents reach the bank outside the permitted presentation period. | Build presentation timing into the logistics schedule. |
| Transport-document errors | Dates, ports, consignee information or other data conflict with the credit. | Check shipping instructions before the carrier issues final documents. |
| Unworkable certificate | The LC requires evidence that cannot practically be produced. | Remove or amend impossible conditions before shipment. |
| Buyer-controlled condition | Payment depends on documentation controlled by the applicant. | Avoid unnecessary conditions that the beneficiary cannot control. |
Draft LC Review
Review the Credit Before It Becomes an Amendment Problem
The draft should be tested against the commercial contract, Incoterm, shipping route, actual document issuers, tenor and financing structure before the applicant instructs the issuing bank.
More documents do not automatically mean more security. Every unnecessary documentary condition creates another potential discrepancy. Requirements should correspond to an identifiable commercial risk.
Letter of Credit Financing
Use the LC to Support the Working-Capital Structure
An acceptable documentary credit can do more than secure payment. Depending on the issuing bank, confirmation status, transaction economics and tenor, it may support financing before or after shipment.
Finance Procurement or Production
An acceptable export contract and LC may form part of the lender’s underwriting for a pre-export working-capital facility.
Discount the Receivable
A usance or deferred-payment LC can potentially be discounted so the exporter receives cash before the contractual maturity.
Improve the Bank Risk
Confirmation by an acceptable institution can materially alter how financing providers assess the receivable.
Importer and Exporter Strategy
Both Parties Need the LC to Work, but Their Priorities Differ
If You Are the Importer
Your objective is to obtain the goods on commercially workable payment terms while requiring useful documentary evidence before the bank pays.
- Align the LC with the purchase contract
- Avoid unnecessary documentary conditions
- Understand facility and collateral requirements early
- Consider deferred payment where working capital matters
- Avoid repeated amendments
If You Are the Exporter
Your objective is to receive a bank undertaking you can actually comply with while managing issuing-bank, country and payment-timing risk.
- Review the draft before issuance
- Check every required document
- Assess confirmation where appropriate
- Avoid applicant-controlled documentary conditions
- Assess discounting if payment is deferred
Letter of Credit Costs
What Determines the Cost of a Letter of Credit?
Bank charges vary by institution and transaction. The primary drivers are the risk being taken, the amount, the tenor, the country exposure, the applicant’s credit quality and whether additional banks are adding confirmation or financing.
| Banking Cost | Main Drivers | What to Watch |
|---|---|---|
| Issuance Charges | Applicant credit, amount, tenor, facility and collateral. | Confirm availability before agreeing impossible commercial terms. |
| Advising Charges | Advising-bank tariff and transaction requirements. | Determine which party bears charges outside the issuing bank. |
| Confirmation Charges | Issuing-bank risk, country risk, amount and tenor. | High-risk jurisdictions can materially change the economics. |
| Amendment Charges | Post-issuance changes to LC terms. | Strong drafting reduces avoidable amendments. |
| Document Examination | Bank tariff and document presentation. | Discrepancies can create additional handling and delay. |
| Discounting | Tenor, currency, issuing bank and financing risk. | Model the financing economics before agreeing long usance terms. |
UCP 600 and ISBP
Understand the Banking Rules Behind Documentary Credits
Commercial Letters of Credit commonly incorporate the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. Documentary examination practice is further informed by the International Standard Banking Practice.
UCP 600
UCP 600 addresses key documentary-credit mechanics including issuance, advising, confirmation, examination, transport documents, insurance, amendments and transferable credits.
International Chamber of Commerce UCP 600ISBP
International Standard Banking Practice provides detailed guidance on how documents presented under documentary credits are examined in practice.
International Chamber of Commerce ISBPLetter of Credit Structuring
Have Financely Structure the LC Around the Actual Trade
We review the underlying commercial transaction and determine how the Letter of Credit should work before issuance. The scope can cover the sales contract, draft LC wording, documentary requirements, tenor, confirmation, transferability, usance mechanics, discrepancy risk and financing options.
Sales contract alignment
Draft LC review
MT700 field review
Documentary requirement design
Sight and usance analysis
UPAS assessment
Confirmation strategy
Transferable LC structuring
Back-to-back LC structuring
Discrepancy prevention
LC discounting assessment
Trade financing pathway
Letter of Credit Support
Submit Your Transaction
Tell us what the buyer, seller and banks need the Letter of Credit to accomplish.
Request a QuoteBeyond LC Administration
We Look at the Financing Transaction Around the Letter of Credit
Documentary compliance is only one part of the transaction. The LC may also affect supplier working capital, importer payment terms, confirmation risk, receivable discounting and the wider trade finance facility.
Get the Terms Right
Align the LC with the underlying commercial transaction before issuance.
Turn Payment Security Into Liquidity
Assess discounting, supplier finance, pre-export facilities or other funding structures around the trade.
Solve the Wider Trade Finance Requirement
Where appropriate, Financely can support the transaction beyond the documentary credit itself.
Frequently Asked Questions
Letter of Credit FAQ
What is a Letter of Credit?
A Letter of Credit is a bank undertaking to honor a complying documentary presentation according to the terms of the credit.
Is a Letter of Credit the same as a documentary credit?
Yes. The terms Letter of Credit and documentary credit are commonly used for the same commercial trade finance instrument.
Does a Letter of Credit guarantee payment?
The issuing bank undertakes to honor a complying presentation. Documentary compliance with the terms of the credit therefore remains fundamental.
What is a sight Letter of Credit?
A sight LC provides for payment following a complying presentation rather than at a later deferred maturity.
What is a usance Letter of Credit?
A usance or deferred-payment Letter of Credit provides for settlement at a future maturity.
What is an UPAS LC?
A UPAS structure is used where the exporter wants earlier payment while the importer requires deferred repayment terms.
What is a confirmed Letter of Credit?
A confirmed LC includes an additional undertaking from a confirming bank in addition to the issuing bank.
What is a transferable Letter of Credit?
A transferable LC expressly allows the first beneficiary to request transfer of the credit to a second beneficiary subject to the applicable terms and banking rules.
What is a back-to-back Letter of Credit?
A back-to-back structure uses a separate secondary LC to support the supplier leg of an intermediary trade.
What is an LC discrepancy?
A discrepancy is a documentary issue identified when a presentation does not comply with the terms of the Letter of Credit or applicable documentary-credit rules and practice.
What is MT700?
MT700 is the SWIFT message format commonly used by banks to issue a documentary Letter of Credit.
Can a Letter of Credit be discounted?
In qualifying transactions, a deferred-payment or usance LC receivable may be discounted subject to the issuing bank, tenor, documentary position and financing provider approval.
Can I obtain financing against an export Letter of Credit?
Potentially. An acceptable LC may support pre-shipment or post-shipment financing depending on the transaction, issuing bank, supplier economics and lender appetite.
Who pays Letter of Credit charges?
Allocation of bank charges should be agreed by the buyer and seller and reflected correctly in the documentary credit.
How do I reduce Letter of Credit discrepancies?
Review the draft before issuance, use realistic dates, avoid unnecessary documents and make sure every requirement can actually be satisfied by the party expected to produce it.
Before the LC Is Issued
Make Sure the Credit Can Actually Be Performed
Submit the underlying transaction, proposed payment structure, beneficiary requirements and any available draft LC. Financely can assess the structure before unworkable terms become amendments, discrepancies or delayed payment.
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Send us the transaction and the Letter of Credit requirement.
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