Complete Guide to Letter of Credit (L/C) in International Trade
What is a Letter of Credit (L/C)?
A Letter of Credit (L/C) is one of the most widely used payment instruments in international trade. It serves as a secure financial guarantee issued by a bank on behalf of the buyer, promising to pay the seller a specified amount upon presentation of compliant shipping and trade documents.
In simple terms, an L/C is a written commitment from a bank to pay the seller once the terms and conditions specified in the credit are fulfilled and verified by proper documentation.
⸻
Types of Letters of Credit
1. Sight L/C
Payment is made immediately upon presentation of complete and correct documents.
2. Usance or Deferred L/C
Payment is made at a specified future date after the presentation of documents (e.g., 30, 60, or 90 days).
3. Revocable L/C
Can be amended or canceled by the buyer without the seller’s consent (rarely used due to lack of security).
4. Irrevocable L/C
Cannot be amended or canceled without the agreement of all parties. This is the standard and most secure form in global trade.
5. Confirmed L/C
A second bank (usually the seller’s bank) adds its own guarantee to the L/C in addition to the buyer’s bank.
6. Back-to-Back L/C
Used in triangular trade. The seller uses the buyer’s L/C to open a new L/C in favor of their own supplier.
7. Revolving L/C
Suitable for ongoing or repeat transactions where the credit amount replenishes automatically over time.
⸻
General Steps in Using a Letter of Credit
1. Agreement between buyer and seller to use an L/C
2. Buyer requests issuance of L/C from their bank
3. Issuing bank sends the L/C to the seller’s (beneficiary’s) bank
4. Seller ships the goods and presents required documents to the bank
5. Bank verifies the documents and processes the payment as agreed
⸻
Advantages of Using L/C
For the Seller (Exporter):
• Assured payment from a reputable bank rather than relying on the buyer
• Minimizes the risk of non-payment
• Enhances credibility and competitiveness in global markets
For the Buyer (Importer):
• Payment is only made if the seller fulfills all agreed conditions
• Ensures proper and timely shipment of goods
• Builds trust in dealing with new or distant suppliers
⸻
Key Considerations When Using L/C
• Clearly define all terms and conditions (product details, shipping deadlines, ports, document deadlines, etc.)
• Work with experienced and internationally recognized banks
• Comply with international regulations like UCP 600 (Uniform Customs and Practice for Documentary Credits)
• Ensure accurate preparation and timely presentation of documents (invoice, bill of lading, certificate of origin, insurance, etc.)
⸻
Conclusion
A Letter of Credit is an essential tool in international trade that reduces financial risk, ensures timely and secure payment, and promotes trust between buyers and sellers. Understanding its types, benefits, and procedures is critical for every professional engaged in cross-border commerce.
A Bank offers both Standby Letters of Credit (SBLC) and Bank Letters of Credit (BLC) as part of their comprehensive trade finance services. These instruments are designed to facilitate secure international trade transactions by providing payment assurances to sellers and mitigating risks for buyers.
🔹 Standby Letter of Credit (SBLC)
An SBLC is a guarantee issued by Emirates NBD on behalf of a buyer, ensuring payment to the seller if the buyer fails to fulfill contractual obligations. This tool is commonly used in international trade to build trust between new trading partners. [1]
🔹 Bank Letter of Credit (BLC)
Emirates NBD provides various types of Letters of Credit, including:
• Import Letters of Credit: Ensuring payment to suppliers upon presentation of compliant shipping documents.
• Export Letters of Credit: Providing exporters with payment assurance from the buyer's bank.
• Revolving, Transferable, and Confirmed LCs: Tailored to meet specific trade requirements. [2]
