A letter of credit (LC) is a bank undertaking to pay a seller if the seller presents documents that comply with the terms of the credit. Banks examine documents, not the goods, so the paperwork must match the LC closely.
A simplified flow
- Buyer and seller agree on an LC in their sales contract.
- The buyer applies to its bank (the issuing bank), which issues the LC.
- The LC is advised to the seller, often through a bank in the seller's country.
- The seller ships the goods and presents the required documents.
- If the documents comply, payment is made or promised according to the credit.
Why details matter
A mismatch as small as a different spelling of a company name or a late shipment date can be treated as a discrepancy. Reading the LC carefully before shipping, and asking for amendments early if needed, can avoid delays.
Commercial letters of credit are usually subject to the ICC's UCP 600 rules. Whether a bank will issue one, and on what terms, is always the bank's own decision.
