Facilitating international trade using “Letters of Credit”
A Letter of Credit (LC) is a written bank promise that the exporter will be paid, once specific conditions are met.
It reduces risk for both buyer and seller and makes international trade more reliable and predictable.
Step-by-step process
1. The deal is struck Buyer and seller sign a sales contract that states price, goods, shipment terms, and which documents are required.
2. Buyer requests the LC The importer asks their bank (the Issuing Bank) to issue a Letter of Credit in favor of the exporter.
3. Issuing Bank accepts the obligation The Issuing Bank reviews the request and agrees to pay the exporter if the exporter presents documents that match the LC terms.
4. LC is issued to the exporter’s bank The Issuing Bank sends the LC to the exporter’s bank, called the Advising Bank or Confirming Bank.
5. Exporter ships the goods. The exporter ships the goods according to the contract and collects the required documents, for example a bill of lading and commercial invoice.
6. Documents are presented The exporter gives the documents to their bank, which forwards them to the Issuing Bank.
7. Issuing Bank verifies documents The Issuing Bank checks that the documents strictly comply with the LC’s terms.
8. Payment is made If documents comply, the Issuing Bank pays the exporter’s bank.
9. Exporter receives payment The exporter’s bank pays the exporter.
10. Importer pays and collects goods The importer pays the Issuing Bank and receives the documents needed to take possession of the shipment.
Key documents commonly required
– Bill of Lading
– Commercial Invoice
– Packing List
– Certificate of Origin
– Insurance Certificate
Why businesses use Letters of Credit
– Reduces payment risk for exporters.
– Assures delivery requirements for importers.
– Makes financing easier because banks are involved.
– Supports large and cross-border transactions with trusted bank guarantees.
Quick practical tips
– Always match the LC wording exactly to the sales contract.
– Identify required documents early and confirm who will prepare them.
– Allow extra time for document checks to avoid delays.
Understanding Letters of Credit helps exporters and importers trade with confidence, backed by clear bank commitments.