Last reviewed: 10 September 2026
A letter of credit is the buyer’s bank telling the seller: bring these documents complete and I guarantee the payment. It lets two parties who do not know each other trade safely. There is one rule to understand: the bank never sees the goods, it reads the documents. Even if the cargo is perfect, payment stops when the documents do not match the credit, so under an LC the real work is in preparing the paperwork.
The process in order
- Buyer and seller agree the contract and the credit terms in writing.
- The buyer applies to their bank, which issues the credit.
- The credit reaches a correspondent bank in the seller’s country and is advised to the seller.
- The seller checks the text; if a term cannot be met, an amendment is requested before loading.
- The goods are shipped, documents are prepared and presented to the bank.
- The bank examines the documents; if they comply payment is made, if not a discrepancy is raised.
Confirmed or unconfirmed
Under an unconfirmed credit the undertaking to pay sits only with the buyer’s bank. Under a confirmed credit a bank in the seller’s country takes on the same undertaking, so in a geography carrying country or bank risk the seller secures a second signature. Confirmation costs extra and the credit states who bears it. Timing is a separate choice: payable at sight or at a later date.
Typical causes of a discrepancy
- The goods description on the invoice not matching the description in the credit word for word.
- Documents presented after the presentation period stated in the credit.
- A bill of lading dated later than the latest shipment date allowed.
- A required document named differently or missing from the presentation.
- Amounts, quantities or weights that do not agree between documents.
Is a letter of credit needed on every order
No. A credit gives security but brings bank charges and a documentary burden; on a small order that cost is out of proportion. In an established relationship a wire transfer is faster and cheaper: an advance on order confirmation, the balance before shipment. A credit makes sense on a first transaction, on high-value orders, and where the buyer’s own bank requires it.