What is the difference between a confirmed and unconfirmed LC?

An unconfirmed LC is a payment obligation of the issuing bank only. A confirmed LC adds a second payment guarantee from the advising/confirming bank in the exporter's country. Exporters request confirmation when they don't trust the issuing bank (e.g., in politically or financially unstable countries). Confirmation costs extra but eliminates country risk.

UCP 600 (Uniform Customs and Practice for Documentary Credits) is the set of rules published by the ICC that governs how LCs work internationally. Almost all LCs state 'subject to UCP 600'. It defines how banks examine documents, what constitutes a discrepancy, and payment timing. The current version (UCP 600) has been in force since 2007.

Can an LC be amended after issuance?

Yes — but only with the agreement of all parties (applicant, issuing bank, advising bank, and beneficiary). The exporter must formally accept the amendment. Amendments take time and cost fees. Never start production or shipment based on LC terms you can't meet — request the amendment first.

What happens if there's a discrepancy?

The bank issues a notice of refusal within 5 banking days. The exporter has options: correct and re-present documents (if time allows), ask the bank to send documents on approval (applicant waives the discrepancy), or request that the applicant directly contact the issuing bank to accept the discrepancy. Discrepancy fees apply either way.

What is 'negotiation' of an LC?

When the nominated bank 'negotiates' an LC, it purchases the exporter's documents and pays the exporter before receiving funds from the issuing bank — essentially advancing the payment. The bank earns a discount fee. This is different from 'payment' where the bank simply transmits documents and pays when it receives funds from the issuing bank.

How long does an LC take to open?

Typically 3–7 banking days from the importer submitting the application to the exporter receiving the LC. Urgent issuances can be done faster. The exporter should not start production until they have received and approved the LC — not just been told it's been issued.

Is a letter of credit the same as a bank guarantee?

No. An LC is a primary payment instrument — the bank pays when documents comply. A bank guarantee is a secondary obligation — the bank only pays if the buyer/seller defaults on their primary obligation. Standby LCs function similarly to bank guarantees, but are governed by UCP 600 or ISP98, not the rules for bank guarantees.

What does 'freely negotiable' mean on an LC?

A freely negotiable LC allows any bank to negotiate (purchase) the documents, not just the nominated bank. This gives the exporter flexibility to approach any bank in their country, which is useful if the nominated bank doesn't offer favorable terms. The nominated bank still has first right of negotiation.

Letter of Credit

Which LC Type Does Your Trade Deal Need?

Select your LC type and trade direction to see payment timing, risk profile, and the exact documents your bank will require.

LC type

You are the

Payment timing

At sight — upon document presentation

Risk level

Low

Best for

Seller requires payment before releasing goods

Typical bank fee

0.1–0.5% of LC value

LC Types

Letters of Credit Explained

An LC is a bank guarantee that payment will be made to the exporter once specific documentary conditions are met. The type determines when and how payment is triggered.

Sight LC

Most common

Payment is made immediately ('at sight') when the exporter presents complying documents to the nominated bank. The issuing bank examines documents and pays within 5 banking days. Standard choice for most commercial transactions between new trading partners.

Usance (Deferred Payment) LC

Buyer-friendly

Payment is deferred for a fixed period — typically 30, 60, 90, or 180 days after shipment or document presentation. Gives the importer time to receive, sell, and generate revenue before paying. Exporters can discount the deferred payment through their bank for immediate cash.

Standby LC

Backup instrument

Not intended as a primary payment method. Functions like a bank guarantee — the exporter can draw on it only if the buyer fails to pay. Used for open account trading where the seller wants a security net. Common in US trade; Europe tends to use bank guarantees instead.

Transferable LC

For intermediaries

Allows the first beneficiary (trader/broker) to transfer all or part of the LC to a second beneficiary (actual manufacturer). The trader substitutes their own invoice for the manufacturer's, keeping the margin confidential. Requires the LC to specifically state 'transferable'.

Revolving LC

Repeat shipments

Automatically reinstates after each drawing up to a defined limit. Avoids the cost of opening a new LC for every shipment. Used for regular shipments of the same goods between established trading partners. Can be cumulative (unused amounts carry forward) or non-cumulative.

How It Works

Opening and Using a Letter of Credit

An LC involves four parties and multiple steps. Missing any one step or document can delay payment by weeks.

Sales contract specifies LC payment

Buyer and seller agree in the sales contract that payment will be by LC. The contract specifies LC type, validity period, latest shipment date, and port of loading/discharge.

Importer applies to issuing bank

The importer (applicant) instructs their bank to issue an LC in favour of the exporter. The bank assesses the importer's credit and charges an issuance fee. The importer must have a credit facility or cash deposit.

Issuing bank sends LC to advising bank

The issuing bank transmits the LC (usually via SWIFT MT700) to a correspondent bank in the exporter's country — the advising bank. The advising bank authenticates the LC and forwards it to the exporter.

Exporter reviews and ships

The exporter carefully checks every term and condition in the LC before shipping. If any term cannot be met (e.g., shipment deadline too tight, impossible document requirements), they must request an amendment before shipping.

Exporter presents documents

After shipment, the exporter gathers all required documents and presents them to the nominated/advising bank within the LC's document presentation period (typically 21 days from B/L date, but before LC expiry).

Bank examines documents

The bank has 5 banking days to examine the documents for compliance. Even minor discrepancies (wrong date format, missing weight, spelling errors) give the bank grounds to refuse. If complying, the bank forwards to the issuing bank.

Issuing bank pays

The issuing bank checks documents and, if complying, debits the importer's account and pays the advising/confirming bank, which pays the exporter. For sight LCs this takes 5–10 days from presentation; for usance LCs, payment is on the maturity date.

Importer receives documents

The importer receives the original documents (especially the original B/L) from the issuing bank. The original B/L is the title document needed to take delivery of the cargo at destination.

Required Documents

Documents Typically Required Under an LC

Every document must comply strictly with LC terms. Banks check against the LC conditions — not the underlying trade transaction.

Commercial Invoice

Must match exactly: applicant name and address, goods description, unit price, total amount, currency, and Incoterms — all exactly as stated in the LC. Even capitalisation differences can cause discrepancies.

Bill of Lading (B/L)

Must be 'clean on board' (no clauses noting damaged packaging), issued to order of the issuing bank (unless LC specifies otherwise), and show the port of loading and discharge stated in the LC. Notify party is typically the applicant.

Packing List

Detailed breakdown of all packages: number of cartons/pallets, gross and net weight, dimensions. Must be consistent with the commercial invoice — the same goods, same quantities. Discrepancies between documents are a leading cause of rejection.

Certificate of Origin

Certifies the country of manufacture. Required by customs at destination for duty purposes. The LC will specify the issuing authority (e.g., Chamber of Commerce, government body) and sometimes the specific form required (GSP Form A, EUR.1, etc.).

Insurance Certificate

Required if the LC is on CIF or CIP terms. Must be for at least 110% of the invoice value, cover the risks specified in the LC (typically ICC A), and be dated no later than the B/L date. Open cover policies issue certificates per shipment.

Inspection Certificate

Pre-shipment inspection by a named third party (SGS, Bureau Veritas, Intertek). The LC will specify the inspector and what they must certify (quantity, quality, packing). Issued after physical inspection of the cargo before loading.

Discrepancies

6 Most Common LC Discrepancies

Over 70% of first document presentations contain at least one discrepancy. Banks are entitled to refuse — even for typographical errors.

Late document presentation

Documents presented after the LC expiry date or after the presentation period (default 21 days from B/L date under UCP 600). This is the most common and most avoidable discrepancy. Build in buffer time.

Late shipment

B/L date is after the latest shipment date stated in the LC. Cannot be corrected — the goods are already shipped. Requires an LC amendment before the original deadline if the exporter can't meet it.

Goods description mismatch

The goods description on the commercial invoice doesn't match the LC exactly. Adding or omitting a word, wrong unit price, wrong currency, or wrong Incoterms. The invoice must mirror the LC description precisely.

Inconsistency between documents

Quantities, weights, or values differ between the invoice, packing list, and B/L. Banks compare all documents against each other. Even minor arithmetic differences (rounding) are grounds for rejection.

B/L not 'clean on board'

Carrier adds clauses to the B/L noting damaged, wet, or torn packaging. LC terms almost always require a clean B/L. If the carrier notes a problem, the exporter must fix the packaging issue before loading or the discrepancy is unavoidable.

Missing or incorrect endorsements

The B/L requires endorsement ('to order' B/Ls must be endorsed in blank or to the issuing bank). Insurance certificates may require endorsement. Missing signatures or incorrect endorsement wording causes rejection.

FAQ

Common Questions

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