Letter of credit
A letter of credit is a bank-issued promise to pay the seller upon presentation of specified documents — typically a bill of lading, commercial invoice, and inspection certificate. It is the standard payment instrument for international trade where buyer and seller don't fully trust each other.
An LC has three main parties: the issuing bank (the buyer's bank), the advising or confirming bank (often in the seller's country), and the beneficiary (the seller). The buyer (applicant) instructs the issuing bank; the bank's promise replaces direct buyer-to-seller trust.
Payment is triggered by documents, not by physical delivery. If the documents presented match the LC's terms exactly — vessel name, port, dates, descriptions — the bank pays. If even small discrepancies exist, payment can be held until the discrepancies are resolved, often by amendment.
Sight LCs pay on presentation; usance LCs pay at a defined future date (30, 60, 90 days after sight or after BOL date). Confirmed LCs add a second bank's promise, useful when the issuing bank's country has political or credit risk.
Document discrepancies are the most common reason an LC payment gets held. Common discrepancies: spelling differences between the LC and the BOL, late presentation, missing certificate of origin.
Related terms
- Bill of lading vs. shipping manifestA bill of lading is a legal contract between a shipper and a carrier for a single shipment. A manifest is an operational document listing all cargo on a vehicle, vessel, or container, often covering many bills of lading.
- Commercial invoiceA commercial invoice is the seller's bill to the buyer for an international shipment, listing goods, quantities, prices, and terms. It is the central document for customs valuation in most jurisdictions.
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