What is a Letter of Credit?

A Letter of Credit (L/C) is a written commitment from a bank to pay a seller on behalf of a buyer, provided that the seller meets precisely defined conditions and submits the required documents. It serves as a fundamental instrument in international trade, providing security to both parties involved in the transaction.

Key Components:

  • Applicant (Buyer/Importer)
  • Beneficiary (Seller/Exporter)
  • Issuing Bank
  • Advising Bank
  • Supporting Documents

Types of Letters of Credit

Sight Letter of Credit

Payment is made immediately upon presentation of compliant documents.

  • Immediate payment
  • Common in commodity trades
  • Requires strict document compliance

Deferred Payment Letter of Credit

Payment is made after a specified period from document presentation.

  • Payment term: 30-180 days
  • Suits capital goods trading
  • Provides buyer payment flexibility

Revolving Letter of Credit

Automatically renews for a specific time period or value.

  • Periodic renewal
  • Ideal for regular trading
  • Reduces administrative work

Standby Letter of Credit

Acts as a guarantee, drawn only if the applicant defaults.

  • Security instrument
  • Common in US markets
  • Similar to bank guarantee

L/C Fee Calculator

L/C Process Flow

  1. Step 1: Commercial Contract

    Buyer and seller agree on terms and L/C as payment method

  2. Step 2: L/C Application

    Buyer applies for L/C at their bank (Issuing Bank)

  3. Step 3: L/C Issuance

    Issuing Bank creates L/C and sends to Advising Bank

  4. Step 4: L/C Advice

    Advising Bank verifies L/C and notifies seller

  5. Step 5: Shipment

    Seller ships goods and prepares required documents

  6. Step 6: Document Presentation

    Seller presents documents to Advising Bank

  7. Step 7: Document Check

    Banks verify documents against L/C terms

  8. Step 8: Payment

    Payment is made to seller if documents comply

L/C Market Statistics

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Frequently Asked Questions

What are the main advantages of using a Letter of Credit?
  • Secure payment guarantee for sellers
  • Risk mitigation for both parties
  • Facilitates international trade
  • Enables better cash flow management
  • Provides documentary evidence of transaction
What documents are typically required for a Letter of Credit?
  • Commercial Invoice
  • Bill of Lading or Airway Bill
  • Insurance Certificate
  • Certificate of Origin
  • Packing List
  • Inspection Certificate (if required)
How long does it take to process a Letter of Credit?

The processing time typically ranges from 1-3 business days for issuance, once all requirements are met. Document examination usually takes 5 business days under UCP 600 rules. Total transaction time, including shipping and document presentation, varies based on trade routes and terms.

What are the costs involved in a Letter of Credit?
  • Issuance fee: 0.1% - 1% of L/C value
  • Confirmation fee (if required): 0.1% - 2%
  • Amendment fee: Fixed amount per amendment
  • Document handling fee: Fixed amount per set
  • Swift charges: Fixed amount per message