What is a Letter of Credit (LC)?
A Letter of Credit (LC) is a bank-issued guarantee that ensures the seller gets paid once they present the required shipping documents. For international trade, it's the most secure payment method — protecting both buyer and seller.
How a Letter of Credit Works: Step by Step
- Buyer and seller agree on terms — product, price, delivery date, Incoterms, and LC type
- Buyer applies for LC at their bank — the issuing bank
- Issuing bank sends LC to seller's bank — the advising bank
- Advising bank notifies the seller — verify LC terms match agreement
- Seller produces and ships goods — within LC expiry date
- Seller presents shipping documents to their bank — B/L, invoice, packing list, cert of origin
- Advising bank checks documents — must match LC terms exactly
- Documents sent to issuing bank — for final verification
- Issuing bank releases payment to seller's bank
- Buyer pays bank — and receives shipping documents
- Buyer uses documents to clear customs — and take possession of goods
Types of Letters of Credit
Revocable vs. Irrevocable LC
- Irrevocable LC (standard) — cannot be modified without all parties' consent
- Revocable LC (rare) — can be changed by issuing bank without notice
Confirmed vs. Unconfirmed LC
- Confirmed LC — seller's bank adds its own guarantee (reduces risk for seller)
- Unconfirmed LC — seller relies on issuing bank's promise
Sight vs. Usance LC
- Sight LC — payment upon presentation of compliant documents
- Usance (Time) LC — payment after specified period (30/60/90 days)
Documents Required for LC
Standard LC documents:
- Draft/Bill of Exchange — payment demand
- Commercial Invoice — dated, describing goods exactly as LC states
- Bill of Lading (B/L) — clean, on-board, made out to order of shipper
- Packing List — detailed weights and dimensions
- Certificate of Origin — for duty preference
- Insurance Certificate — if CIF terms
- Inspection Certificate — if required by LC
Critical: Every document must match the LC terms exactly. Even a comma discrepancy can cause a "discrepancy" and delay payment.
Costs of Using an LC
- Issuance fee: 0.25-1.5% of LC value
- Amendment fee: $50-200 per change
- Advising fee: $50-200 (seller's bank)
- Negotiation fee: 0.1-0.5% of LC value
- Discrepancy fee: $50-150 per error
- Courier fee: $50-100
- Total cost: 0.5-2.5% of LC value
LC Credit Sales: A Better Alternative
For qualified buyers, LC credit sales offer the security of an LC without the complexity and cost. With CSMG Supply Chain:
- ✅ No LC application at your bank
- ✅ No upfront payment or deposit
- ✅ Pay on flexible terms (30-90 days)
- ✅ Professional documentation management
- ✅ 14+ years of banking expertise
About CSMG Supply Chain: We are a professional China sourcing agent with 14+ years of banking expertise. We source any product from China, offer LC credit sales for qualified buyers, and provide end-to-end supply chain solutions.