Letter of Credit (LC) – A Beginner’s Guide for Indian Exporters
- 📍 Introduction
- 💼 What is a Letter of Credit?
- 🔁 How Does an LC Work?
- 🏷️ Key Parties Involved
- 📦 Types of Letters of Credit
- 📃 Common Documents Required Under LC
- ✅ Benefits of Using a Letter of Credit
- ⚠️ Risks & Challenges of LCs
- 🧠 Tips for Indian Exporters Using LC
- 🧾 LC vs Advance Payment vs Open Account
- 📥 Coming Soon:
📍 Introduction
If you’re an Indian exporter dealing with international buyers, you’ve probably come across the term Letter of Credit (LC). It’s one of the most trusted and widely used payment methods in global trade.
But how does it really work? Who guarantees the payment? And what documents do you need?
This guide breaks down everything you need to know about LCs — in simple, practical language for exporters like you.
💼 What is a Letter of Credit?
A Letter of Credit (LC) is a guarantee issued by a bank on behalf of a buyer (importer), promising to pay the seller (exporter) a specified amount as long as agreed documents are submitted.
✅ It protects both buyer and seller
✅ The bank acts as a trusted middleman
✅ Used when buyer and seller don’t know each other well
🔁 How Does an LC Work?
Here’s a simple flow of how an LC transaction works:
- Buyer & seller agree on LC payment terms
- Buyer asks their bank (Issuing Bank) to issue an LC
- LC is sent to seller’s bank (Advising Bank)
- Exporter ships goods and submits shipping documents
- Bank verifies the documents
- Payment is released to exporter
- Buyer receives goods and reimburses the bank
🏷️ Key Parties Involved
- Applicant – The Buyer (Importer)
- Beneficiary – The Seller (Exporter)
- Issuing Bank – Buyer’s bank that issues the LC
- Advising Bank – Exporter’s bank that receives & verifies LC
- Negotiating Bank – Bank that checks documents and pays
📦 Types of Letters of Credit
| Type | Meaning |
|---|---|
| Sight LC | Payment is made immediately upon document verification |
| Usance LC | Payment is made after a credit period (30/60/90 days) |
| Irrevocable LC | Cannot be changed without the consent of both parties |
| Revocable LC | Can be changed or cancelled by the buyer anytime (rarely used) |
| Confirmed LC | A second bank (usually exporter’s) guarantees payment alongside issuing bank |
| Transferable LC | Can be transferred to other suppliers (used by traders or agents) |
📃 Common Documents Required Under LC
- Commercial Invoice
- Packing List
- Bill of Lading / Airway Bill
- Certificate of Origin
- Insurance Certificate
- Inspection Certificate (if applicable)
- Any other documents specified in the LC terms
✅ Benefits of Using a Letter of Credit
- ✅ Ensures payment security
- ✅ Builds trust with new international buyers
- ✅ Can be used for working capital loans (LC discounting)
- ✅ Often preferred by large buyers and government tenders
⚠️ Risks & Challenges of LCs
- ❌ Complex document requirements (1 small mistake = rejection)
- ❌ Bank fees can be high (LC charges, confirmation, courier)
- ❌ Delay in payment if documents are not perfect
- ❌ Some buyers may delay opening the LC
🧠 Tips for Indian Exporters Using LC
- Read LC terms carefully before shipment
- Match documents word-for-word with LC conditions
- Ask your bank to “pre-check” the LC before accepting
- Avoid vague terms like “latest model” or “standard packaging”
- Use a reputed freight forwarder & CHA to avoid shipping delays
- Keep scanned copies of every submitted document
🧾 LC vs Advance Payment vs Open Account
| Mode | Risk to Exporter | Risk to Buyer | Used When? |
|---|---|---|---|
| Advance Payment | None | High | New seller, small value deals |
| Letter of Credit | Low (if compliant) | Low | Formal trade, medium to high value |
| Open Account | High | None | Long-term trusted buyer |
📥 Coming Soon:
🎁 Free LC Document Checklist + Sample LC Format
👉 Subscribe to get your copy instantly!
