Documentation
Letter of Credit (L/C)
A bank undertaking to pay the seller once they present documents that comply exactly with the credit terms, used to secure payment between parties who do not know each other well.
In depth
A letter of credit substitutes the bank's creditworthiness for the buyer's. The bank pays against documents, not against goods, and it applies the terms with total literalism — a misspelled consignee, a date outside the shipment window, or a bill of lading that says "clean on board" where the credit asked for "shipped on board" is a discrepancy, and a discrepancy entitles the bank to refuse. A large share of first presentations are rejected for exactly this kind of clerical mismatch. Sellers should check the credit against what they can actually produce the day it arrives, not the day they ship.
Key points
- Bank pays against compliant documents, not against the goods
- Terms are applied literally — small mismatches are valid grounds to refuse
- Usually requires a negotiable "to order" bill of lading
- Review the credit terms on receipt, not at shipment