Letter of Credit (LC)
A Letter of Credit (LC) is a documentary trade finance instrument issued by a bank on behalf of a buyer (applicant) in favor of a seller (beneficiary), providing an irrevocable undertaking to pay upon presentation of compliant documents in accordance with the terms of the credit. LCs are primarily used in international trade to mitigate payment risk between importers and exporters.
Letters of Credit are governed by the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits (UCP 600). These internationally recognized rules standardize documentary requirements, define the obligations of issuing and confirming banks, and ensure global enforceability.
Types of Letters of Credit
Under international banking practice, Letters of Credit are structured based on payment terms and risk enhancement features.
Sight Letter of Credit
A Sight LC provides payment to the beneficiary immediately upon presentation of compliant documents. It is commonly used when exporters require prompt settlement upon shipment.
Usance (Deferred Payment) LC
A Usance LC, also known as a Deferred Payment LC, provides payment at a future maturity date, such as 30, 60, 90, or 180 days after shipment. This structure allows buyers to optimize working capital while maintaining supplier assurance.
Back-to-Back Letter of Credit
A Back-to-Back LC involves the issuance of a second LC based on an existing LC as security. It is used when a trader needs to open a new LC in favor of a supplier using the original LC as collateral.
Revolving Letter of Credit
A Revolving LC automatically reinstates its value after utilization, either by time or amount. It is suitable for long-term supply agreements involving repetitive shipments.
Transferable Letter of Credit
A Transferable LC permits the beneficiary to transfer part or all of the credit to a second beneficiary. This structure is commonly used in intermediary or structured trade transactions.
Confirmed Letter of Credit
A Confirmed LC includes an additional undertaking from a second bank. This additional confirmation protects the seller against issuing bank risk or country risk.
How a Letter of Credit Works
Letter of Credit substitutes the creditworthiness of the issuing bank for that of the buyer. The seller ships goods in accordance with the contract and presents the required documents to the nominated or confirming bank. If the documents strictly comply with the LC terms under UCP 600, payment is made according to the agreed structure.
Banks deal exclusively with documents, not with the underlying goods or performance of the contract. This documentary principle ensures objectivity and standardized risk management in international trade transactions.
Key Highlights
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Governed by ICC UCP 600
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Secure documentary payment mechanism
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Available in Sight and Deferred Payment structures
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Optional confirmation for enhanced risk protection
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Issued and transmitted via secure SWIFT channels
Purpose and Benefits of Letters of Credit
Letters of Credit reduce counterparty risk and facilitate cross-border trade by providing structured payment assurance. They protect exporters from non-payment while ensuring importers pay only against compliant shipment documentation.
LCs are widely accepted across commodity trading, manufacturing exports, infrastructure supply, and structured commercial transactions. Their standardized global framework enhances trust, liquidity management, and transactional discipline.
ITF supports startups, SMEs, and established corporations by structuring Letter of Credit solutions aligned with UCP 600 standards and international banking practice, enabling secure and efficient trade execution.
Typical Use Cases of Letters of Credit
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Import and export of goods
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Commodity trading transactions
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Manufacturing supply contracts
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Cross-border trade settlements
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Structured trade finance transactions
Application for Letter of credit (LC)
Note: Explore ITF’s range of Letter of Credit (LC) solutions designed to support international trade and cross-border transactions. Our experienced trade finance team works with importers, exporters, commodity traders, manufacturers, and project suppliers across global markets. You may speak with us directly, submit a completed LC application form, or contact us for further assistance.
Our dedicated sales and support team will guide you through the entire process, including application assessment, LC structuring, draft review, service agreement execution, issuance via secure SWIFT channels, and ongoing transaction support.