Letter of Credit (LC)

A Letter of Credit (LC) is a written undertaking by a buyer's bank to pay a seller a specified amount when the seller presents a defined set of compliant documents, typically shipping, insurance, and inspection certificates, by a stated deadline. It transfers the payment risk from the seller's trust in the buyer to the buyer's bank's creditworthiness.

What is a Letter of Credit?

In international goods procurement, a Letter of Credit is the mechanism by which buyers and suppliers who do not know each other can transact safely across borders. The buyer's bank (issuing bank) opens the LC in favour of the seller (beneficiary), setting out the precise documents the seller must present to receive payment. A correspondent bank in the seller's country (confirming or advising bank) checks that documents conform and releases payment. The LC is irrevocable once issued, meaning neither buyer nor seller can cancel it unilaterally.

LCs appear frequently in international tenders conducted under an ifb (Invitation for Bids) or ICB process for goods, where the contracting authority or borrower specifies LC payment terms in the contract conditions. They are distinct from the bank-guarantee instruments (bid security, performance-guarantee) that sellers provide to buyers, since an LC runs in the opposite direction: it is the buyer's bank committing to pay the seller.

Why Letter of Credit matters for bidders

For suppliers, an LC is a strong payment assurance, especially when selling to government buyers or public agencies in unfamiliar markets. However, strict document compliance is critical: even a minor discrepancy between the documents presented and the LC terms, such as a wrong shipment date, an incorrect weight, or a missing endorsement, can cause the bank to refuse payment. Exporters should engage their freight forwarder and trade finance team before bidding to confirm they can produce every required document cleanly. LC opening charges and discounting fees also affect the effective sale price, so they must be included in the pricing model.

FAQ

What is the difference between a confirmed and an unconfirmed LC?

A confirmed LC has a second bank (usually in the seller's country) adding its own payment commitment, removing the risk that the issuing bank in the buyer's country might fail to pay. An unconfirmed LC relies solely on the issuing bank.

Can an LC be amended after it is opened?

Yes, but only with agreement from all parties, including the buyer, the seller, and both banks. Amendments take time, so discrepancies should be flagged before shipment, not after.

How long does it take to open an LC?

Typically five to ten business days after the buyer instructs its bank, though complex or high-value LCs may take longer. Sellers should request the LC well before the scheduled shipment date.