A letter of credit, or LC, is a written undertaking by your bank to pay the supplier once they present documents that comply exactly with its terms. It suits larger orders, new supplier relationships, and cases where the supplier wants bank security before buying raw material.
This is general guidance, not financial or legal advice. Your bank's trade finance team can explain its own fees, requirements and wording.
How an LC works
- You agree the terms with the supplier, including the LC, in the contract.
- You apply to your bank, which issues the LC.
- The supplier's bank in India, the advising bank, checks it and passes it on.
- The supplier ships and presents the required documents through its bank.
- Banks check the documents against the LC, not the goods.
- If the documents comply, your bank pays, at sight or on a set later date.
Types you will hear about
- Sight LC. Payment once compliant documents are presented.
- Usance or deferred LC. Payment a set number of days after shipment or presentation.
- Confirmed LC. A second bank, often in India, adds its own undertaking. Suppliers ask for this when they doubt the issuing bank or country.
- Irrevocable. Most LCs are, and cannot be changed without all parties agreeing.
What an LC does not do
An LC protects payment, not quality. If the documents comply, the bank pays, even if the goods are poor. To link payment to quality, require an inspection certificate from a named, independent inspector among the documents, with clear test parameters.
Most LCs are issued subject to UCP 600, the International Chamber of Commerce rules. Banks examine documents strictly. A spelling difference, a late shipment or a missing stamp can cause a discrepancy and delay payment.
When an LC makes sense
- A first order of meaningful size with a supplier you have not traded with.
- When the supplier will not ship on advance plus CAD without security.
- When your bank or internal rules require bank-backed payment.
- When you need deferred payment and the supplier needs bank assurance.
Writing it so it works
Most delays come from wording the supplier cannot meet. Our guide to payment terms for agri imports compares an LC with an advance and CAD.
- Keep the documents list short and match it to what Indian authorities actually issue.
- Set a latest shipment date and expiry with enough time for production and presentation.
- Allow a weight or quantity tolerance where the contract allows one.
- Name the inspection body and the certificate wording.
- Agree the draft LC with the supplier before you issue it.
How we help
We review the LC draft against the specification and the documents the processor can produce, and our inspection report can serve as a required document. We then check the document set before presentation. Ask for a free sourcing review.