Documentary Letters of Credit
Documentary Letters of Credit for Structured Trade Transactions
A documentary Letter of Credit is a bank undertaking to pay when the beneficiary presents documents that comply with the instrument’s terms. It can provide a defined payment mechanism for a buyer and seller, but it does not remove the need to review the contract, documents, issuing bank, conditions and applicable rules.
Types of LC
Sight and Usance.
| Type | Plain-language explanation | Points to confirm |
|---|---|---|
| Sight LC | Payment is generally due after presentation and examination of compliant documents under the LC terms. | Exact document requirements, examination rules and bank process. |
| Usance LC | Payment is deferred until an agreed future date or tenor, subject to the instrument wording. | Start date, maturity calculation, acceptance conditions and tenor available. |
Usance tenors
Usance LC tenors such as 90, 120 and 180 days, calculated from the date of the Airway Bill (AWB), Bill of Lading (BL) or another accepted transport document, can be discussed. Availability depends on the relevant banking channel, and the actual start date and maturity calculation are stated in the final instrument.
Potential Benefits
What an LC can offer.
- Defines documentary conditions for payment under the instrument.
- Can support trust between a buyer and seller in cross-border trade.
- Provides a documented framework tied to a commercial contract.
- Can be structured around the transaction, subject to bank approval and applicable requirements.
- Makes careful document preparation and review essential.
How to prepare for a discussion
- Summarise the underlying goods or services and the parties involved.
- Explain the transaction value, currency, shipment schedule and proposed payment terms.
- Identify the intended beneficiary and any supplier / buyer requirements.
- Prepare the draft sale contract, pro forma invoice or other available documents.
- Share transport-document expectations and the requested LC tenor, if known.
- Be ready for due diligence and additional documents requested by the relevant institution.
FAQ
Is a Letter of Credit guaranteed to be issued?
No. Any arrangement is subject to transaction review, due diligence, bank approval and applicable requirements.
Does an LC remove all commercial risk?
No. It provides a documentary payment framework, but parties must still assess counterparty, product, shipping, document and bank-related risks.
Can I choose the tenor?
A requested tenor can be discussed, but availability and wording depend on the transaction and relevant bank.
How are charges calculated?
Charges are case-specific and can depend on transaction value, tenor, duration and structure. See Process, Pricing & Documentation.