A new buyer offers payment by LC. That can be a useful starting point, but “LC payment” is not a complete agreement. You still need to know which bank will issue it, when payment falls due and whether you can produce every required document.
This guide explains a commercial documentary letter of credit for export sales. It is an educational overview, not approval of a particular bank, credit or transaction. Have your bank review the actual wording and the applicable rules before you commit.
What is a letter of credit?
A letter of credit, or LC, creates a documentary payment arrangement. The buyer asks its bank to issue a credit in the seller’s favour. The issuing bank’s undertaking depends on a complying presentation, not simply on the seller saying that goods were dispatched.
ICC’s Uniform Customs and Practice for Documentary Credits, UCP 600, applies when the credit expressly incorporates those rules.
UCP 600 treats the credit as separate from the underlying sale contract. Banks deal with documents, not the goods or performance themselves. This distinction helps explain both the usefulness and the limits of an LC.
Who takes part in an export LC?
| Party | Role | Question for the exporter |
|---|---|---|
| Applicant | The buyer requesting issuance | Does the commercial agreement match the proposed credit? |
| Beneficiary | The seller in whose favour the LC is issued | Is the business identity accurate? |
| Issuing bank | Issues the documentary undertaking | Is the bank and its country exposure acceptable? |
| Advising bank | Advises the credit and checks its apparent authenticity under the applicable process | Has the credit arrived through a verified bank channel? |
| Confirming bank, if any | Adds its own undertaking when authorised or requested and agreed | Has confirmation actually been added? |
| Nominated bank | The bank with which the credit is available | What role has it agreed to perform? |
An advising bank does not automatically add a payment undertaking. Likewise, being named as nominated bank does not alone mean that bank has agreed to pay or negotiate. Ask your bank to explain its exact role in plain language.
How does the LC process work?
- Agree the sale: settle the product, amount, delivery term and proposed payment structure.
- Review the draft credit: the exporter and its bank check whether the conditions can be met.
- Issue and advise the LC: the buyer arranges issuance through the banking system.
- Resolve changes: obtain any necessary amendment before acting on an unsuitable condition.
- Ship as agreed: arrange the actual goods and transport and collect the required documents.
- Present documents: submit the required set at the specified place and within the applicable deadlines.
- Examine and settle: banks assess compliance and payment proceeds according to the undertaking and maturity.
Use Wedrang’s export proforma invoice guide to prepare the commercial proposal. A PI can help describe agreed terms; it is not itself the bank’s issued undertaking.
What should you check before accepting the credit?
| Area | What to examine |
|---|---|
| Business identities | Correct beneficiary and applicant names |
| Amount and currency | The agreed value and any permitted tolerances |
| Availability and maturity | Sight payment, deferred payment, acceptance or negotiation terms |
| Dates | Latest shipment date, presentation period and expiry |
| Route and shipment options | Required ports or places, partial shipments and transshipment wording |
| Documents | Issuer, content, signature and original/copy requirements |
| Bank and country exposure | Whether confirmation or another arrangement is needed |
| Charges | Who pays issuance, advising, confirmation, amendment and discrepancy costs |
Read conditions as tasks. If an inspection certificate is required, identify who will issue it, what it must say and when it can be obtained. A condition that depends on a buyer-controlled signature can create practical difficulty even when the goods are ready.
Sight, deferred and confirmed: what do the labels mean?
A sight LC calls for payment against a complying presentation under its terms. “At sight” does not mean the proceeds necessarily appear in your account the moment a vessel departs. Document examination and the banking process still matter.
A deferred-payment credit provides for payment at a defined maturity. Understand how that date is calculated and whether your business can fund the period before receipt. Discuss any financing or discounting separately with the bank.
Confirmation adds a second bank’s undertaking for a complying presentation. HSBC’s guidance identifies confirmation as an option to discuss based on the transaction. It is not automatically included because the LC passes through a familiar local bank.
Under UCP 600, a credit is irrevocable. That does not make every proposed change irrelevant: follow the amendment and acceptance process. Do not rely on a buyer’s informal email saying the bank will correct an unsuitable term later.
Illustrative example: finding a problem before shipment
Illustrative example: An exporter agrees a US$24,000 order for 200 cartons. The proposed LC requires shipment by 10 November and an inspection certificate issued before loading. The inspection provider cannot complete the work until 12 November.
The exporter raises the timing conflict with its buyer and bank before dispatch. The parties seek a workable amendment and verify that it has been issued and accepted as required. These are invented teaching details, not a completed real transaction.
The mistake would be to ship late and assume the buyer’s goodwill fixes the documents automatically. A commercial conversation may help resolve a problem, but it is not a substitute for meeting the credit or following the bank’s discrepancy process.
What is a documentary discrepancy?
A discrepancy is a failure of the presentation to meet the applicable credit requirements and rules. Examples can include missing documents, unsuitable transport evidence or missed deadlines. Do not assume a typo is always harmless or that every variation necessarily requires rejection; banks examine under the actual standard.
Prepare a document checklist from the issued credit. Give each requirement an owner, a source and a target date. Compare the final documents with the LC rather than checking only that they agree with your invoice template.
If the bank identifies a problem, ask what correction or other handling is possible. A buyer’s willingness to accept goods does not automatically remove the bank’s documentary concerns. Corrected presentation must still be assessed against the relevant timing and terms.
Which risks remain with LC payment?
An LC does not inspect the shipment or settle every quality dispute. The importer still needs specifications, inspection arrangements and a supplier agreement. The exporter still needs to assess bank exposure, country risk, practical compliance and the effects of applicable law.
It also does not replace ordinary counterparty checks. Read Wedrang’s guide to verifying overseas buyers before treating a credit proposal as proof that every contact and instruction is genuine.
How does an LC compare with other payment arrangements?
| Method | Main feature | Exporter’s practical concern |
|---|---|---|
| Advance payment | Buyer pays before the agreed supply milestone | Confirm genuine receipt and agreed refund or performance terms |
| Documentary collection | Banks handle documents under collection instructions | Collection does not add the same issuing-bank payment undertaking |
| Commercial LC | Bank undertaking against a complying presentation | Terms, compliance, bank exposure and cost |
| Open account | Payment becomes due after supply on agreed credit terms | Buyer non-payment and credit exposure |
Choose a structure around the transaction, not a slogan that one method is always safest. Ask for a clear fee estimate and identify who pays each charge. Include bank costs and funding time when assessing the order’s margin.
Frequently asked questions
Is an LC a payment guarantee without conditions?
No. The documentary undertaking depends on the credit and applicable rules. A non-complying presentation can create delay, extra cost or non-payment risk.
Does the bank guarantee the goods are good quality?
No. Banks examine documents rather than conducting the buyer’s product inspection. Specify quality controls separately.
Is a commercial LC the same as a standby LC?
No. A commercial documentary credit is normally the planned payment mechanism against documents. A standby commonly supports an obligation if the applicant fails to perform. Have your bank identify the instrument and rules.
Can I agree amendments by email with the buyer?
Commercial agreement is only part of the process. Verify the bank-issued amendment and the required acceptance before relying on changed credit terms.
Use the export documents overview to assign preparation responsibilities, then check the bill of lading guide when your credit requires ocean transport evidence. The issued credit determines the presentation requirements.
Sources and scope
Checked 16 October 2026: ICC, Uniform Customs and Practice for Documentary Credits, UCP 600; ICC Academy, Documentary Credits: Rules, Guidelines and Terminology; US International Trade Administration, Letter of Credit and Trade Finance Guide; HSBC, Letters of Credit and international-payment guidance. This overview does not reproduce the complete rules or approve a particular transaction.
Editorial disclosure: This article was drafted with AI assistance using the primary sources listed here. No named human author, expert review or firsthand shipment experience is claimed. It is educational guidance, not a transaction-specific legal, customs or banking determination.