Letter of Credit (L/C)
Banking commitment to pay the seller against submission of compliant documents, the main payment instrument in international trade.
Letter of Credit (L/C)
The letter of credit (or documentary credit) is an irrevocable commitment from a bank to pay the seller a specified amount, provided that the seller presents documents strictly in accordance with the terms of the credit.
Operation
The buyer asks his bank (issuing bank) to open a documentary credit in favor of the seller. The bank undertakes to pay against submission of compliant documents (invoice, B/L, certificates, etc.).
Types
- Irrevocable credit: cannot be modified without the agreement of all parties (standard)
- Credit confirmed: a second bank adds its commitment
- Transferable credit: can be transferred to a second beneficiary
UCP 600 Rules
Documentary credits are governed by the Uniform Rules and Practices (UCP 600) published by the International Chamber of Commerce (ICC).
Advantages and disadvantages
The L/C offers maximum security for both parties but involves significant bank charges and rigorous documentation.