L/C (Letter of Credit)

TL;DR: An L/C is a promise from the buyer’s bank to pay the seller, as long as the seller presents documents that meet the credit’s terms. It protects both sides, but it takes more time, paperwork and fees than a wire transfer.

The buyer applies for the L/C at its bank, called the issuing bank. The credit is then sent to the seller through an advising bank in the seller’s country. After shipping, the seller presents the required documents, such as the commercial invoice, packing list, bill of lading and certificate of origin. If they comply, the bank pays.

Most letters of credit follow the ICC rules known as UCP 600. Banks check documents, not goods. A small mismatch, such as a spelling difference or a late shipment date, can count as a discrepancy and delay payment. A confirmed L/C adds a second bank’s guarantee, which helps when the seller is unsure about the issuing bank or country.

An L/C can be payable at sight, meaning soon after documents are accepted, or at a later date, known as a usance or deferred L/C.

For buyers, the L/C only protects you as far as its documents do. It does not prove the goods are correct or undamaged. If quality matters, as it does with custom mosaic murals, require an inspection certificate from a third party as one of the documents. Compare with T/T, D/P and Pre-Shipment Inspection.