What a letter of credit does
A documentary credit is a bank undertaking to pay a seller once compliant documents are presented. The seller no longer relies on the buyer's willingness to pay, only on the issuing bank's obligation and the accuracy of the paperwork.
It is the default instrument where parties are new to each other, where jurisdictions carry enforcement risk, or where the shipment value is material to either side.
The parties and the flow
The buyer applies to its bank, which issues the credit in favour of the seller. An advising bank in the seller's country passes it on, and may add confirmation. The seller ships, presents documents, and the bank pays against a compliant presentation.
Payment can be at sight or at a deferred tenor, commonly thirty to one hundred and eighty days, which is what turns a credit into a working capital tool for the buyer.
Confirmation and country risk
Where the issuing bank or its country carries risk the seller is unwilling to hold, a confirming bank adds its own undertaking. The seller then looks to a bank in its own jurisdiction for payment.
Confirmation costs vary widely by issuing bank and country, typically from a fraction of a per cent to several per cent per annum.
Costs and timings
Issuance fees commonly run from a quarter to one and a half per cent per annum on the credit amount, with document examination, amendment and discrepancy fees on top. Issuance itself takes days once facility lines are in place.
The larger cost is usually the collateral or facility the buyer must hold to support issuance. Structuring that line is where most of the negotiation sits.
Where transactions go wrong
Most problems are documentary rather than commercial. Discrepant presentations, inconsistent descriptions of goods, late shipment against the stated latest date and expired credits are routine causes of delayed payment.
Check the credit line by line on receipt and request amendments before shipping, not afterwards. We arrange issuance and confirmation lines with banks active in your corridors, with no upfront fees.
Frequently asked questions
Is a letter of credit the same as a bank guarantee?
No. A documentary credit is a primary payment mechanism against documents. A guarantee is a secondary undertaking that is called only when the underlying obligation fails.
Can a seller get paid early under a deferred credit?
Yes. A bank can discount the accepted obligation, giving the seller funds at sight while the buyer keeps the tenor.
What happens if documents are discrepant?
The issuing bank can refuse payment and refer to the buyer for waiver. Payment then depends on the buyer's agreement, which removes much of the protection.
Last reviewed: 2026-08-20