A Letter of Credit for Exporters, Explained
A letter of credit is a bank’s promise to pay an exporter once the right shipping documents land on its desk, not a reward for sending the goods on time. That one distinction explains most of what confuses first-time exporters about how a letter of credit for exporters actually works, and why a shipment can leave right on schedule while payment still gets held up by paperwork.
What a letter of credit actually promises
A letter of credit, or LC, is issued by the buyer’s bank at the buyer’s request. It names the exporter as the party who gets paid, and it states the amount and currency. It also lists exactly which documents must be presented before the bank hands over the money. The bank is not checking whether the goods that shipped were the right ones. It is checking whether the documents presented match what the LC asked for, word for word. That is the hardest idea for a new exporter to absorb: banks deal in documents, not goods.
Banks apply a standard rulebook called UCP 600, published by the International Chamber of Commerce and followed by banks in most countries that use letters of credit. For a plain-language overview written for exporters, trade.gov’s guide to letters of credit is a reasonable place to start.
How the LC payment process for export actually moves the money
Once both sides agree to settle by letter of credit, here is the LC payment process export shipments actually follow, step by step:
- Buyer and exporter agree sale terms, including that payment will be by letter of credit, and record it in the sale contract or purchase order.
- The buyer applies to their own bank, the issuing bank, to open the LC in the exporter’s favour.
- The issuing bank sends the LC to a bank in the exporter’s country, the advising bank, which forwards it to the exporter.
- The exporter checks the LC terms against the sale contract line by line, flags any discrepancy with the buyer before shipping, then ships the goods and assembles the documents the LC calls for.
- The exporter presents the documents, usually through their own bank, within the LC’s stated presentation period.
- The bank examines the documents against the LC’s wording and against UCP 600.
- If the documents comply, the bank pays (or commits to pay on a future date, for a term LC), and the issuing bank reimburses it.
Documents required under letter of credit for exporters
Three documents cause most of the trouble.
- A commercial invoice that does not match the LC’s stated goods description or price.
- A bill of lading dated after the LC’s shipment deadline.
- A certificate of origin missing a required stamp.
Any one of these can give a bank grounds to raise an objection.
| Document | What the bank checks it against |
|---|---|
| Commercial invoice | Goods description, quantity, price and currency stated in the LC |
| Bill of lading or airway bill | Shipment date against the LC’s latest shipment date, and the ports or airports the LC named |
| Packing list | Weights, package counts and marks consistent with the invoice and transport document |
| Certificate of origin | Correct exporting country, and any specific wording or stamp the LC requires |
| Insurance certificate | Required only when the trade term puts insurance on the exporter, and the cover amount the LC specifies |
| Inspection certificate | Required only if the LC calls for one, and issued by the body the LC names |
Irrevocable, confirmed, and other terms you will hear
Nearly every LC issued today is irrevocable: once opened, the issuing bank cannot cancel or amend it without the exporter’s agreement. A confirmed irrevocable letter of credit adds a second promise from a bank in the exporter’s own country. Exporters ask for this confirmation when they are not confident about the issuing bank’s country risk, or about the issuing bank itself. Irrevocable versus revocable, and confirmed versus unconfirmed, are two separate questions, and the difference between them deserves its own explanation rather than a paragraph here.
Common reasons payment gets delayed or refused
- Documents presented after the LC’s expiry date or its stated presentation period
- A bill of lading or invoice that does not exactly match the LC’s goods description, quantities or price
- Missing or incorrectly worded certificates, such as origin, inspection or insurance
- The same shipment described inconsistently across two or more documents
- A shipment made from a port, or by a transport method, the LC did not authorise
A discrepancy does not automatically mean lost payment. The bank will often give the exporter a chance to correct what can still be corrected. Or the buyer can waive a minor discrepancy and let the bank pay anyway. But every day spent fixing paperwork is a day the exporter’s money sits uncollected. That is why getting the documents right at the point of shipment usually matters more than knowing the rulebook by heart.
Frequently asked questions
What is a letter of credit for exporters, in simple terms?
It is a written promise from the buyer’s bank that the exporter will be paid a stated amount, in a stated currency. Payment follows once the exporter presents documents that match the letter of credit’s terms exactly.
Who pays the bank charges for a letter of credit?
This is negotiated between buyer and exporter and should be written into the sale contract. It is common for each side to pay their own bank’s charges, but there is no universal rule, so it should not be assumed.
What is the difference between an irrevocable and a revocable letter of credit?
An irrevocable LC cannot be changed or cancelled once issued without the exporter’s consent. A revocable one can be changed or cancelled unilaterally by the issuing bank, which is why revocable LCs are rarely used in export trade today.
Can a bank refuse to pay even if the goods were shipped correctly?
Yes. The bank checks documents against the LC’s wording, not the physical shipment, so a paperwork mismatch can hold up payment even when the goods themselves are exactly as ordered.
How long does an exporter have to present documents under a letter of credit?
The LC itself states a presentation period, commonly measured in days after the date of the transport document. Documents presented after that period, or after the LC’s own expiry date, are treated as discrepant.
What is a confirmed letter of credit, and when does an exporter need one?
It is an LC where a second bank, usually one in the exporter’s own country, adds its own payment guarantee on top of the issuing bank’s. Exporters ask for confirmation when they are uncertain about the issuing bank’s country risk or the issuing bank itself.