A letter of credit (LC) is a bank's undertaking to pay the exporter once the exporter presents documents that comply with the LC's terms. Most LCs follow the ICC's UCP 600 rules. The bank checks documents, not goods, so payment depends on the invoice, transport document, insurance and other papers matching the LC exactly.
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Parties to an LC
| Party | Role |
|---|---|
| Applicant | The buyer, who asks its bank to issue the LC |
| Issuing bank | The buyer's bank, which undertakes to pay |
| Advising bank | Bank in India that informs the exporter of the LC |
| Confirming bank | Adds its own undertaking to pay, if the LC is confirmed |
| Beneficiary | The exporter, who presents documents and gets paid |
Types of LC
- Sight LC: payment when compliant documents are presented
- Usance LC: payment at a future date, for example 60 or 90 days after the bill of lading
- Confirmed LC: a second bank, often in India, also guarantees payment, useful when the issuing bank or country is a risk
Documents usually required
- Commercial invoice and packing list
- Bill of lading or air waybill
- Insurance certificate, if the terms are CIF or CIP
- Certificate of origin, inspection or quality certificates
- Bill of exchange, where called for
How to avoid discrepancies
- Check the draft LC before it is issued and ask for changes to terms you cannot meet
- Copy names, addresses and goods description exactly as written in the LC
- Ship within the latest shipment date and present within 21 days of shipment, unless the LC says otherwise, and before expiry
- Make sure all documents agree with each other
Frequently asked questions
What is a letter of credit in export?
A bank's undertaking to pay the exporter when compliant documents are presented under the LC's terms.
What is UCP 600?
The ICC's Uniform Customs and Practice for Documentary Credits, the rules most LCs follow.
What is a discrepancy?
A difference between the documents and the LC terms. The bank can refuse to pay until it is accepted or corrected.
Should I ask for a confirmed LC?
Consider it when the issuing bank or the buyer's country is a credit risk, because a confirming bank also undertakes to pay.
How BuyGenix Solutions helps
We prepare and check export documents so they match each other, the buyer's order and any letter of credit, which avoids delays at customs and at the bank. BuyGenix members can also see live buyer requirements from importers in India and abroad.
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BuyGenix Solutions handles letter of credit documentation and every related registration your business needs, from documentation to filing.
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