Letters of credit: a beginner's guide

A Letter of Credit (LC or L/C) is a payment instrument issued by a bank guaranteeing that a seller will receive payment as long as certain documentary conditions are met. It is one of the safest ways to pay in international trade.

How It Works

1. Buyer and seller agree on LC terms in the sales contract.
2. The buyer's bank (issuing bank) opens the LC in favor of the seller.
3. The seller's bank (advising bank) notifies the seller.
4. The seller ships the goods and presents the required documents to the advising bank.
5. If documents comply, the issuing bank pays the seller (or the advising bank pays and gets reimbursed).

Key Documents Usually Required

Commercial invoice, packing list, bill of lading, certificate of origin, and insurance certificate. The LC specifies exactly which documents are needed and how they must be worded.

Common Pitfalls

• Discrepancies — Even a minor typo (e.g., misspelled company name) can cause the bank to reject documents. Always double-check every field.
• Late presentation — Documents must be presented within the LC validity period and usually within 21 days of shipment.
• Amendments — Any change to the LC requires agreement from both parties and their banks, which takes time and costs money.

On Faktorist, you can indicate LC as your preferred payment method when creating or responding to tenders.