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Trade Finance & Payment

Letter of Credit

Also known as: L/C, LC, Documentary Credit

A letter of credit is a written undertaking by a bank, issued at the request of a buyer, to pay a seller a defined amount provided the seller presents documents that strictly comply with the terms stated in the credit. By substituting the creditworthiness of a bank for that of the buyer, a letter of credit gives the exporter strong assurance of payment while assuring the importer that payment will be released only against evidence that the goods were shipped as agreed. It is the workhorse of higher-risk international trade, governed by internationally accepted banking rules, and it makes payment contingent on documents rather than on the goods themselves.

The JFS takeLicensed customs broker · Filer 82G

Banks deal in documents, not goods. A credit pays against a compliant presentation: if the documents match, the bank pays even when the cargo is wrong; if they do not, the bank refuses even when the cargo is perfect. Most first-time discrepancies are trivial and self-inflicted — a date, a spelling, a missing copy.

Where it matters for compliance

  • Payment terms do not change customs value, but the documents a credit generates often evidence it.

Related terms

Documentary CollectionA documentary collection is a payment method in which the exporter entrusts the shipping documents to its bank with instructions to release them to the importer only against payment or against acceptance of a draft, using the banking system as a conduit rather than a guarantor.Standby Letter of CreditA standby letter of credit is a bank guarantee that functions as a backstop rather than a primary means of payment: it is drawn upon only if the party who arranged it fails to perform an obligation, such as paying an invoice or completing a contract.Bill of ExchangeA bill of exchange, or draft, is a written, unconditional order by one party (the drawer, typically the exporter) instructing another party (the drawee, usually the importer or its bank) to pay a specified sum either on sight or at a defined future date.

Reviewed by a licensed customs broker. Definitions are general information, not legal or customs advice for a particular shipment. Duty rates, tariff programs and agency requirements change frequently.