Letters of Credit (LC): Secure Your Global Trade Transactions

A reliable financial pledge that ensures payment—and peace of mind—for both buyers and sellers.

A Letter of Credit (LC) is a bank-issued guarantee that ensures payment to the seller once specified documents—like commercial invoices, bills of lading, and certificates of origin—are presented correctly. While often generalized, the more precise term, Documentary Letter of Credit (DLC), emphasizes this documentation requirement.

It acts as a financial intermediary, replacing buyer risk with the bank’s assurance of payment. DLCs are the gold standard in international trade, offering timely and secure trade settlement.

 

Why LC Matters in Global Trade

  • Strengthens Trade Confidence: LCs bridge the trust gap, ensuring both sides deliver as agreed.

  • Universal Acceptance: Widely recognized, LCs encourage smoother cross-border business.

  • Customizable: Tailor payment terms to suit individual supply chain needs.

  • Solid Credibility: A confirmed LC from a trusted bank boosts buyer reliability.

Types of Letters of Credit

Letters of Credit (LCs) can be structured in different ways to meet the needs of buyers, sellers, and intermediaries. Each type serves a unique role in mitigating risk, improving trade finance flexibility, and ensuring payment security.

Commercial LC

The most common type of LC, used as a primary payment method in international trade. The issuing bank commits to pay the seller once all agreed shipping and documentation requirements are met, ensuring security for both parties.

Usance LC

Also known as a deferred payment LC, it allows the buyer a set period (e.g., 30, 60, or 90 days) after receiving goods to make payment. This arrangement provides the buyer with time to generate revenue from the goods before settling the payment.

Back-to-Back LC

Enables an intermediary (often a trader or broker) to use an LC issued in their favor to secure another LC for their supplier. This is particularly useful in complex supply chains where middlemen play a vital role in connecting buyers and sellers.

Standby LC (SBLC)

Functions more like a safety net or guarantee rather than a payment mechanism. It assures the seller or beneficiary that they will be compensated if the buyer fails to meet contractual obligations, making it popular for securing service contracts and large projects.

Irrevocable LC

Cannot be modified or canceled without the agreement of all parties (buyer, seller, and issuing bank). This ensures stability and reliability in the transaction, especially for high-value or long-term deals.

Confirmed LC

In addition to the issuing bank’s guarantee, a second (confirming) bank—usually in the seller’s country—also guarantees payment. This provides extra assurance in cases where the issuing bank’s reliability or the buyer’s country risk is a concern.

Red Clause LC

Allows the seller to receive an advance payment before shipment for production or procurement purposes. This early disbursement can be critical for suppliers who need working capital to fulfill the order.

Slight LC

A Sight LC is a payment instrument where the issuing bank makes payment to the seller immediately upon verifying the required shipping and commercial documents. This ensures the exporter receives funds without delay, significantly improving cash flow.

Letter of Credit — Step-by-Step Process

Clear, secure and compliant — the documentary process that makes international trade reliable. Follow the flow below.

1

Agreement Between Buyer & Seller

Buyer and seller negotiate and agree the commercial terms, incoterms, shipment schedule and payment by Letter of Credit (LC).

2

Buyer Requests LC from Issuing Bank

Buyer submits an LC application to their bank with all transaction details and supporting contract documents; issuing bank assesses credit and drafts the LC.

3

Issuing Bank Sends LC to Advising Bank

Issuing bank transmits the LC to the seller’s advising (or confirming) bank. Advising bank authenticates the LC and notifies the beneficiary (seller).

4

Seller Ships Goods & Prepares Documents

Seller ships goods as per contract, assembles the required documents (commercial invoice, bill of lading, certificates) and presents them to the advising bank.

5

Advising Bank Verifies & Forwards Documents

Advising bank reviews documents for compliance; if correct, it forwards them to the issuing bank. Any discrepancies are flagged for correction to avoid delays.

6

Issuing Bank Reviews & Releases Payment

Issuing bank checks documents against the LC terms. If documents comply, the issuing bank makes payment (sight) or accepts for deferred payment (usance), and the LC is then closed.

Why Choose Kettiwood for Your LC Needs

    • Pan-African Expertise – Trusted relationships with global banking institutions.

    • Full Compliance Support – Document checking, revisions, and UCP 600 guidance.

    • UCP 600 defines international LC rules, reinforcing clarity and confidence.

    • Flexible LC Solutions – Whether you need Irrevocable LCs, Confirmed LCs, or Red Clause LCs—we’ve got you covered.

    • Smooth Transactions – From initial quote to final payment, our process is seamless, accurate, and client-first.

Pitfalls to Watch For (and How We Help You Avoid Them)

  • 80% of trade documents contain errors initially—attribution to complex formatting, misspellings, or missing data.

  • Kettiwood ensures speedy, compliant document preparation and review—minimizing delays or rejections on first submission.

Ready to boost your trade security with a tailored LC solution?

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