Letter of Credit (L/C)
A Letter of Credit (L/C) is an undertaking by a bank, on behalf of the buyer, to pay the seller a stated amount provided the seller presents shipping documents that comply exactly with the L/C terms — typically the bill of lading, commercial invoice, packing list, certificate of origin and insurance. It substitutes the bank's creditworthiness for the buyer's, giving the seller confidence of payment and the buyer confidence the goods were shipped as agreed.
Letters of credit are governed by the ICC's UCP 600 rules and are documentary and strict: payment turns on the documents matching the credit, not on the goods themselves, so a discrepancy (a wrong date, a misspelling, a late presentation) can delay or defeat payment. Managing L/C terms and preparing clean, compliant documents is a core trade-finance and export-documentation skill.
In cross-border trade, buyer and seller often don't know or trust each other — the letter of credit bridges that gap by putting a bank's promise to pay in the middle. But it pays on documents, not goods, so a tiny discrepancy can hold up the money. Mastering L/C documentation is what protects exporters from non-payment and delay.
What are UCP 600?
The ICC's Uniform Customs and Practice for Documentary Credits — the standard rules governing how letters of credit operate.
Why can a letter of credit payment be refused?
Because it pays against documents that must comply exactly; any discrepancy — a wrong date, misspelling or late presentation — can delay or defeat payment.