What is a Letter of Credit and how does it work?

Zoe Bagnall
Content and PR Executive | Business West
18th March 2021

A Documentary Letter of Credit is a method of payment that is used in international trade and is the most secure way of receiving a payment. 

It's a written procedure given by a bank on behalf of an importer to pay an exporter within a certain time frame. The exporter must present the correct documents to the bank to adhere to the terms and conditions outlined in the Letter of Credit. 

The buyer (applicant) who applies for the Letter of Credit sets out a list of terms and conditions under which he would like to buy and import the goods from the seller (beneficiary).

The list usually includes:

  • A description of the goods 
  • The quantity of goods
  • Documentary requirements such as; bills of lading, commercial invoice, certificate of origin, analysis reports, other documents
  • Details of who must be notified when the shipment arrives, the latest date of shipment and the expiry date of the L/C
  • Which ports/airports are to be used
  • The mode of transport used
  • Payment terms 

The letter of credit is then issued by the buyer’s bank (the issuing bank) to the seller’s bank (the negotiating bank). The UK bank can offer confirmation to the Letter of Credit. This additional confirmation means that payment will be guaranteed even if the issuing bank fails to make it, (as long as the documents are in order).

Top tips for working with Letters of Credit 

At Business West, we deliver a fully managed, comprehensive service that conforms to Letter of Credit requirements. Our team of experienced staff will use their strong relationships with all the major global banks to ensure that you receive payment on time for your exports. 

So, what are the main things to consider during the process?

1. Keep a check list of all the documents required 

As mentioned above, there will be certain documents and details needed when agreeing this method of payment with a buyer. A check list is invaluable for ensuring documents are not missed.

2. Make sure the description of goods is error free 

The more information you include, the more chance there will be of errors and non-payment. It’s essential that you clarify details with your customer and ensure all parties use the same terminology and wording. Banks will not have the technical knowledge of your industry so you should describe your goods in layman’s terms.

3. Get timings right

It’s important to agree to time scales for shipment with the buyer. You should leave enough time for goods production and despatch and ensure you know your product lead times.

4. Get a copy of the application before it is sent

It’s a good idea to obtain a copy of the letter of credit before it is issued by the buyer’s bank. When you receive it, you will know exactly what to expect. Having to make amendments costs time and money but this won’t be necessary if amendments are made to the Letter of Credit  before the final L/C  is issued. 

Gary Hopwood, Manager at Post Saver based in Gloucester said:

“We’re really pleased with the service that has been provided to us. It has taken all the worry away from what can be a complicated process and has given me and my customers confidence for easy transactions.

“Your attention to detail and all-round service is very much appreciated.”

Apply for a Letter of Credit

The Letter of Credit process might sound complicated, but our expert team are here to help your business through the process. Find out how we can help. 

  • Apply for a Letter of Credit

    Simply complete the enquiry form below and one of our advisers will be in touch to discuss your specific requirements.

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  • Apply for a Letter of Credit

    Simply complete the enquiry form below and one of our advisers will be in touch to discuss your specific requirements.

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